Snowden Vetter Altegrity’s Loans Plunge: Distressed Debt

Altegrity Inc., the security firm that vetted former intelligence contractor Edward Snowden, has about six months until it runs out of money as the loss of background-check contracts negate most of a July deal with lenders to extend maturities for five years.

“You’re on your way to a selective default; it’s imminent,” Rod Olivero, an analyst at Standard & Poor’s, said by telephone from New York. “There does need to be some sort of workout situation” to reduce the company’s $1.75 billion of bonds and loans after the loss of two contracts.

The firm owned by Providence Equity Partners Inc. probably won’t have enough available cash or short-term loan borrowing ability to cover interest early next year, Olivero wrote in a Sept. 18 report. The company’s $275 million term loan due in July 2019 fell to 89.3 cents on dollar yesterday after trading near face value last month, data compiled by Bloomberg show.

Altegrity’s revenue will decline by about $261.7 million a year with the loss of two U.S. Office of Personnel Management contracts, according to Brian Friel, a government-spending analyst at Bloomberg Intelligence, setting up the cash shortfall. When lenders agreed to refinance debt maturing next year, they required that virtually all of Falls Church, Virginia-based Altegrity’s cash flow at the time be used for debt service.

Notes Slump

Patrick Scanlan, a spokesman at Sard Verbinnen & Co. who represents Providence and Altegrity, declined to comment.

The price of the loan compared with an average 97 cents on the dollar for the S&P/LSTA U.S. Leveraged Loan 100 Index yesterday. The index has declined from 98 cents on Sept. 2.

Altegrity’s $280.4 million of 13 percent second-lien notes due July 2020 plummeted 27 cents on Sept. 10 to 48 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority after news that the personnel-management agency would cancel contracts with the company’s US Investigations Services unit. The cancellations amount to 68 percent of USIS’s $388 million in 2013 federal orders, according to Friel of Bloomberg Intelligence.

USIS underwent government scrutiny after a breach in August of data belonging to the Department of Homeland Security and a whistle-blower lawsuit joined by the Department of Justice. The unit was responsible for the background check on Snowden, a former security analyst who worked as a contractor for the National Security Agency and leaked information about U.S. surveillance programs last year.

‘Little Room’

“Collectively the company had very little room for execution missteps or these kinds of negative surprises,” Raj Joshi, an assistant vice president at Moody’s Investors Service, said by telephone from New York. The loss of the contracts sets back the turnaround it started to engineer in July with the revamp of most of its capital structure that pushed out maturities, he said.

Moody’s rates the company Caa3 with a “negative” outlook, and S&P has a similar CCC- grade. The ratings were cut last month, reflecting the cancellations and increasing competition. The triple-C category reflects issuers with very high credit risk that depend on favorable financial conditions to service their debt.

Other Agencies

Jeffrey Campbell, the company’s chief financial officer and president, said in a July 3 company statement that the recapitalization “provides a longer term capital structure for our businesses to pursue our operational and growth initiatives.”

Altegrity may permanently lose business from other parts of the government, Joshi said. Without specifying which contracts were affected, the company said some other agencies issued stop-work orders and one decided not to renew a contract after the Office of Personnel Management decision, Joshi said.

Profit has fallen at Altegrity, which counts the U.S. government as its biggest customer, as competition for providing background check services has increased. Earnings before interest, taxes, depreciation and amortization dropped 11 percent to $178 million for the 12 months ended June 30, a person with knowledge of the company’s finances said.

The decline added to a 3.4 percent fall to $200 million for the 12 months ended March 31, compared with $207 million during 2013, two people with knowledge of company performance told Bloomberg in July. Altegrity generated $221 million of Ebitda in 2012, one of the people said.

Altegrity’s cash balance halved to about $50 million after it completed the recapitalization plan, Moody’s said in a Sept. 16 report. The company has access to about $25 million in cash held in the U.S. and can effectively use about $30 million of its $60 million revolving loan, according to the report. The company had $120 million in cash on March 31, people told Bloomberg in July.

“It’s too much of a challenge to manage the business with such thin liquidity over the next 12 months or so,” Joshi said.

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