- Two companies downgraded
- Sources challenge rationale
- Firm known for challenging deals
In separate reports, the ratings agency revised its outlook on California Pizza Kitchen Inc. to negative from stable and lowered its corporate credit rating on Aspect Software Inc. to ‘B-‘ from ‘B,’ with a negative outlook. It appears that Golden Gate and a co-investor has already made its money back on the latter company, however.
(UPDATE: However, the ratings agency did not factor into its decisions certain factors that would suggest the companies are healthier than the downgrades imply, two sources close to the investments told Buyouts.)
Golden Gate, a San Francisco-based shop known for taking on challenging investments, bought California Pizza Kitchen in July 2011 in a $470 million deal.
The Los Angeles-based dining chain performed below S&P’s expectations because of revenue declines due to weak traffic and store closures, S&P analysts wrote in their report. The ratings agency’s move comes despite its acknowledgement that EBITDA at California Pizza Kitchen has improved slightly in the past year while the company has sought to cut costs. The agency based its assessment on negative sales trends at comparable businesses, possible price increases on commodities and the concentration of more than 30 percent of the company’s locations in California, among other factors.
“The speculative-grade rating on CPK reflects its ‘highly leveraged’ financial risk profile as a result of the Golden Gate Capital LBO,” the report stated. Though S&P doesn’t say exactly how much debt California Pizza Kitchen is carrying, it states that if the company’s situation deteriorates it could result in leverage “remaining close to 7x.”
(UPDATE: One of the sources said that the company’s EBITDA from January through June was up 20 percent for the comparable period last year, and that it had generated highest amount of EBITDA in its history for the six months of a year. Further, this source said that the EBITDA amount is 14 percent higher than the projection given to lenders and ratings agencies at the beginning of the year. The source declined to provide the actual EBITDA number, which could not be independently verified.The company made these gains, this source said, in part by cutting costs in how it buys its food and staffs its restaurants. As for potential price increases on food costs, this source said the company has breathing room: California Pizza is locked into at least 70 percent of its costs for food until the end of the year. Even after that, the company does not foresee potential rising prices for food to have a huge impact on its profits, the source said.)
Standard & Poor’s said it lowered its rankings on Aspect Software because of “weak near-term earnings prospects and limited covenant headroom at current debt levels.” It expects revenue and EBITDA declines that will lead to leverage of approximately 7x at fiscal year-end.
“We view Aspect’s business risk profile as ‘weak,’ reflecting the company’s modest overall market position and vulnerability to competition from larger and more diversified companies,” credit analyst Katarzyna Nolan wrote in the report. This could be offset, however, by the company’s recurring revenue base, strong cash balances and positive cash flow, Nolan wrote.
Golden Gate and Oak Investment Partners, a venture capital firm, bought a predecessor of Aspect Software for $38 million in April 2003, according to Capital IQ. The Chelmsford, Mass.-based company provides services to help companies process customer service, collections, sales and marketing.
(UPDATE: A second source said that this company is generally performing well, but that it had a several-month delay in releasing a new software-based “automatic call distributor” product, which routes incoming calls for businesses. Because of that, Aspect’s sales force was unable to sell the product for most of the year, this source said. The company’s business should recover in 2013, he said.)
In May 2006, Reuters reported that Aspect Software planned to raise more than $500 million in a 2007 initial public offering, which did not occur. (UPDATE: The same source said this report was inaccurate.) Also in May 2006, the company sponsored a $1.16 billion debt offering that funded a $450 million dividend to Golden Gate and Oak Investment, according to a Credit Investment News report at the time. (UPDATE:Golden Gate has already made about 1.5x its invested capital in Aspect, this source said.)
A receptionist at Oak Investment said the firm does not speak to the press.