Fitch Ratings has downgraded India-based Megasoft Limited's National Long-Term Rating to 'Fitch BBB(ind)' from 'Fitch BBB+(ind)'. The Outlook is Negative. A list of additional rating actions is provided at the end of this commentary.
The downgrade reflects the steep deterioration in Megasoft's credit metrics consequent to the loss of a key customer in 2011. In 2011, revenue fell 10% yoy to INR1,504m, EBITDA margin was 22.3% (2010: 27.2%), gross adjusted financial leverage (total adjusted debt/ operating EBITDAR) was 3.52x (2.33x) and interest coverage was 3.43x (3.01). Megasoft expects to make up for the revenue loss through new contracts from Latin America and Middle East.
The Negative Outlook reflects the potential refinancing risk, stemming from the USD7m loan in Megasoft's subsidiary, XIUS Holding Corp, which is due in 2012. The loan has a corporate guarantee from Megasoft Limited. The company is expecting timely service of its imminent interest and principal commitments primarily using internal accruals in addition to advance payments from customers. In case of delays in such inflows, the company would have to raise debt from other sources to service its obligations.
Negative rating action may result if consolidated gross adjusted leverage increases above 3.0x and/ or gross interest cover falls below 3.0x. Conversely, consolidated gross adjusted leverage below 3.0x and interest cover above 3.0x could lead to the Outlook being revised to Stable.
Incorporated in 1999, Megasoft (represented by its telecom brand XIUS) is engaged in the sale of licenses for products related to pre-paid billing, mobile commerce, roaming and mobile advertising to telecom operators. These products are also hosted on Megasoft's servers for which it receives a monthly payment on a per subscriber basis (annuity revenue). Its head office and development centre are located in Hyderabad. As per the Q112 results, revenue was INR300.8m and operating EBITDA margin was 22.8%, and interest coverage was 3.2x.
Rating actions in Megasoft's bank loans are as follows: