Moody’s Investors Service has downgraded Securus Technologies Inc.’s corporate family rating, its probability of default ratings and the rating for its second priority senior secured notes. Securus is an H.I.G. Capital portfolio company that provides inmate telecommunication services to correctional facilities in the U.S. and Canada.
Moody’s Investors Service downgraded Securus Technologies Inc.’s (“Securus”) Corporate Family Rating, its Probability of Default Rating, and the rating for its Second Priority Senior Secured notes, all to Caa2 from Caa1. The outlook for all ratings remains negative. The rating actions reflect Moody’s views that although Securus has progressed in its turnaround efforts over the past year to stabilize its operations and shore up its liquidity, the company’s current run-rate revenues and cash flows may not be sufficient to support its current capital structure, as the accretion on the 17% PIK subordinated notes has been growing faster than the company’s cash flows. In addition, Moody’s believes that while the potential improvements in the company’s operations may begin to materialize towards the end of 2009, tightening covenants in the first lien senior secured facility increase the possibility of a covenant breach within the next 12-15 months.
..Issuer: Securus Technologies, Inc.
….Probability of Default Rating, Downgraded to Caa2 from Caa1
….Corporate Family Rating, Downgraded to Caa2 from Caa1
….Senior Secured Regular Bond/Debenture, Downgraded to Caa2 from Caa1
..Issuer: Securus Technologies, Inc.
….Senior Secured Regular Bond/Debenture, Upgraded to LGD3, 43% from LGD3, 47%
The Caa2 corporate family rating reflects Securus’ high leverage resulting from a slate of acquisitions since 2004, weak free cash flow generation relative to the CLECs that Moody’s rates, and the uncertain time frame to implement its turnaround plan prior to a potential covenant violation and/or liquidity shortfall. Although Moody’s recognizes that the market for inmate telecommunications providers has been consolidating over the past couple of years, it still remains a tight field with competitive negotiations during contract renewals, leading to ongoing margin pressure. Securus’ offender management software segment provides an opportunity for revenue and cash flow growth, although in Moody’s opinion the positive impact from this business is unlikely to come in the near term.
Moody’s believes that Securus’ high debt levels, rising with the accreting subordinated PIK notes, may not be sustainable over the long term. Moreover, Moody’s views a payment default over the next two years, or some form of distressed exchange of at least a portion of Securus’ debt as increasingly more likely.
Moody’s also maintained Securus’ SGL-4 liquidity rating, constrained mainly by ongoing risk of a technical default for prospective failure to comply with financial maintenance covenants. Moody’s recognizes, however, the near-term improvement in the company’s liquidity profile, aided by the signing of a new credit facility in September 2008, which in Moody’s opinion provides the company with some added operating flexibility over the ensuing 12 months.
Moody’s last rating action was on October 1, 2007, when Securus’ Corporate Family and Second Priority Senior Secured ratings were lowered to Caa1, from B3 and B2, respectively, following the company’s announcement of its expected substantial shortfall of third quarter earnings relative to previous guidance.
The principal methodology used in rating Securus was that for Moody’s Global Telecommunications Industry (December 2007), which can be found at www.Moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.
Additional research and commentary is available to subscribers at www.Moodys.com
Based in Dallas, TX, Securus Technologies, Inc. is one of the largest providers of inmate telecommunication services to correctional facilities in the United States and Canada.