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Rating Action:

Moody's changes Serena Software's ratings outlook to negative; B2 CFR affirmed

Global Credit Research - 17 Jan 2014

New York, January 17, 2014 -- Moody's Investors Service affirmed Serena Software, Inc.'s ("Serena") B2 Corporate Family Rating ("CFR"), B2-PD probability of default rating, existing debt instrument ratings and its SGL-2 Speculative Grade Liquidity rating. Moody's changed Serena's ratings outlook to negative from stable reflecting the company's declining revenues and uncertainty about its growth prospects.

RATINGS RATIONALE

Serena's software license revenues continued to decline in 2013 (YTD 3Q FY 2014 decline of 36.5%) primarily as a result of its sales execution challenges. As a result of the decline in new license sales over the last several quarters, Serena's high-margin maintenance revenues have also declined and could continue to decline at the low single digit percentages in the next 12 to 18 months. The negative outlook reflects Serena's declining revenues and the risk that new license sales could remain weak, at least over the next 12 to 18 months, and absent a meaningful reduction in debt, total debt to EBITDA will likely exceed 5.5x over this period.

However, Moody's affirmed Serena's B2 CFR based on the company's very good levels of cash and Moody's view that cost savings from restructuring and absence of restructuring costs will result in stable EBITDA and increase in free cash flow in the fiscal year ending in January 2015.

Serena's rating is weakly positioned in the B2 category due to the company's elevated financial leverage, especially in the context of its declining revenues. The rating also reflects Serena's niche market focus, its portfolio of mature enterprise software products with limited growth prospects and intense competition in the company's core product segments. The rating is supported by Serena's well-regarded products in the niche application lifecycle management segment of the enterprise software market and its installed base of over 2,400 customers. Serena's credit profile benefits from its high levels of recurring revenues under maintenance contracts (73% for the LTM October 2013 period) and their high renewal rates.

The SGL-2 rating is based on Moody's expectations that Serena will maintain very good levels of cash balances and generate free cash flow. Moody's expects the company to timely address its debt maturities. The maturity for Serena's credit facilities could accelerate by 180 days to September 2015 if any of its senior subordinated notes remain outstanding at that time.

Moody's could downgrade Serena's ratings if its liquidity deteriorates as a result of management's shareholder-friendly financial policies. The ratings could be downgraded if Moody's believes that Serena is unlikely to attain and maintain total debt-to-EBITDA (Moody's adjusted) below 5.5x and free cash flow falls to the low single digit percentages of total debt as a result of further declines in revenue or erosion in margins.

Moody's could stabilize the ratings outlook if Serena maintains good liquidity, its revenues stabilize and it maintains stable EBITDA margins. Given Serena's modest scale, narrow market focus and high financial leverage, a rating upgrade is unlikely in the next 12 to 18 months. However, to the extent the company demonstrates organic revenue growth while meaningfully increasing profitability and reducing total debt to EBITDA to 4x, the ratings could be raised.

Moody's has affirmed the following ratings:

Issuer: Serena Software, Inc.

..Corporate Family Rating -- B2

..Probability of Default Rating -- B2-PD

.....$20 million of Revolving Credit Facility due March 2015 -- B1, LGD3 37% (revised from 38%)

.....$308.5 million (outstanding) of Senior Secured Term Loans due March 2016 -- B1, LGD3 37% (revised from 38%)

......$102 million (outstanding) Senior Subordinated Notes due March 2016 -- Caa1, LGD5 89% (revised from LGD6 90%)

...Speculative Grade Liquidity -- SGL-2

..Outlook: Changed to negative, from stable

Headquartered in San Mateo, CA, Serena Software is a leading vendor of application lifecycle management software. The company reported $185 million in revenues in the twelve months ended October 2013.

The principal methodology used in this rating was the Global Software Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Raj Joshi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's changes Serena Software's ratings outlook to negative; B2 CFR affirmed
No Related Data.

 

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