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Rating Action:

Moody's assigns Ba2 rating to Allen Systems Group's incremental term loans; affirms B2 CFR with stable outlook

28 Apr 2011

Approximately $518 million of debt affected

New York, April 28, 2011 -- Moody's Investors Service affirmed Allen Systems Group, Inc.'s ("ASG" or the "Company") B2 Corporate Family Rating ("CFR") with a stable ratings outlook and assigned a Ba2 rating to the Company's $115 million of term loan B incremental credit facility. ASG's other existing debt instrument ratings were affirmed. The Company plans to use the net proceeds from the incremental credit facility to fund the purchase price for visionapp AG's acquisition.

The following ratings were assigned:

..Issuer -- Allen Systems Group, Inc.

$115 million incremental term loan B due 2015 -- Ba2, (LGD 16%)

The following ratings were affirmed:

..Issuer -- Allen Systems Group, Inc.

Corporate Family Rating -- B2

Probability of Default Rating -- B2

....$25 million senior 1st lien secured revolving credit facility due 2015 -- Ba2, (LGD2 -- 16%), LGD assessment revised from LGD1, 7%

....$78 million ($80 million originally) senior 1st lien secured term loan due 2015 -- Ba2, (LGD2 -- 16%), LGD assessment revised from LGD1, 7%

....$300 million senior 2nd lien secured notes due 2016 -- B3, (LGD5, 71%), LGD assessment revised from LGD4, 61%

Outlook -- Stable

RATINGS RATIONALE

The proposed acquisition of visionapp will extend ASG's existing enterprise information technology (IT) management software suite to include a cloud computing solutions offering which enables the roll-out of cloud computing services for enterprise customers. Although these acquisitions expand the Company's market opportunities, and there is potential to cross-sell into the customer base of the combined companies, the debt-financed acquisitions materially weaken the Company's credit metrics, notably as Debt-to-EBITDA leverage increases from 4.9x to about 5.9x, excluding any acquisition synergies. Additionally, visionapp does not have a track record of positive cash flow generation. Nonetheless, Moody's views the acquisitions as consistent with the Company's history of augmenting and strengthening its product portfolio through acquisitions. The affirmation of the B2 CFR reflects Moody's expectations that ASG will be able revive revenue growth from its legacy products and that it will achieve approximately $18 million of targeted annual cost savings such that Debt-to-EBITDA leverage will be restored to less than 5.0x over the next twelve months. The execution risks of achieving synergies are somewhat tempered by ASG's history of combining companies and achieving synergies from its key acquisitions.

ASG's CFR is weakly positioned in the B2 rating category, which is characterized by the Company's aggressive financial policies and acquisitive growth strategy. The B2 CFR reflects Moody's expectations that ASG will maintain moderate financial risk profile, including Debt-to-EBITDA leverage of between 4.0x-to-5.0x, and that free cash flow (Cash from operations less capital expenditures and dividends) will increase to about 3%-to-4% of its total debt. The B2 rating considers ASG's small scale relative to its larger and better capitalized competitors, and its highly competitive operating environment. The Company primarily competes with large-scale technology vendors such as IBM (rated Aa3), HP (rated A2), CA (rated Baa2), and BMC Software (rated Baa2) as well as several independent niche software providers. The rating is supported by ASG's broad portfolio of well-regarded mainframe and distributed enterprise management software products and its recurring maintenance revenues (63% of total revenues) and high contract renewal rates, which provide good revenue and cash flow visibility. The rating also benefits from the Company's diverse customer base of about 3,200 customers across various industries and good geographic diversity of revenues.

The stable ratings outlook reflects Moody's expectations that the Company will realize synergies from the recent acquisitions in a timely manner such that Debt-to-EBITDA leverage will reduce to less than 5.0x over the next 12 months. The outlook incorporates expectations of improving free cash flow generation through revenue growth rates of mid- to high single digits, consistent with the growth rates in the software industry segments in which ASG operates.

Moody's could downgrade ASG's ratings if leverage could not be sustained below 5.0x as a result of underperformance relative to expectations or delays in realizing the anticipated synergies. Downward rating pressure could develop if revenue and EBITDA growth does not materialize and free cash flow remains negative as a result of increasing competitive pressures or erosion in market share.

Given ASG's elevated financial risk profile, Moody's does not anticipate an upward rating movement in the near term. Nonetheless, in the longer term Moody's could raise ASG's ratings if the Company could sustain Debt-to-EBITDA (Moody's adjusted) below 3.0x and generate free cash flow in excess of 10% of its total debt through revenue and EBITDA growth.

Please see ASG's credit opinion on Moodys.com for additional information.

The last rating action for ASG was on November 5, 2010.

The principal methodology used in rating Allen Systems Group, Inc. was the Global Software Industry Methodology, published May 2009. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Headquartered in Naples, Florida, ASG is a privately-held provider of enterprise management software solutions used by IT departments of enterprise customers to automate tasks, manage content, and monitor performance of their infrastructure across mainframe and distributed computing environments. The Company generated annual revenues of approximately $263 million in 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Raj Joshi
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba2 rating to Allen Systems Group's incremental term loans; affirms B2 CFR with stable outlook
No Related Data.
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