Open Solutions Inc.’s outlook on its immediate future differsthan that of one of the leading raters of debt.

While continuing its “B” corporate credit rating on theprivately held core processing company, Standard & Poor’s saidit has downgraded its outlook “to negative from stable, reflectinguncertainty as to the timing and degree of an operationalturnaround.”

Open Solutions’ $325 million in senior subordinated notescontinues to carry a CCC+ rating and its first-lien creditfacilities’ rating has been lowered from B+ to BB-.

Jacob Schlanger, S&P credit analyst, pinned decliningrevenues on relatively long sales cycles, continuing customerconsolidation and “runoff of the legacy business” that he said is“more than offsetting a growing customer backlog.”

Despite reduced expenses, earnings have been pressured and theGlastonbury, Conn., company’s leverage “is high for the currentrating,” Schlanger said.

“In our view, Open Solutions will be challenged to reverse itsrevenue trend, and its ability to materially reduce leverage overthe coming year is uncertain,” Schlanger said.

David Mitchell, Open Solutions executive vice president andchief marketing officer, has a different view.

While its sales figures have not been publicly disclosed sinceChairman/CEO Louis Hernandez took the company private more thanfour years ago, Mitchell said the firm saw “a material increase inour adjusted operating income on a sequential and year-over-yearbasis in 2011 and we expect that trend to continue in 2012.”

He said that included a 37% increase in third quarter 2011operating income over third quarter 2010. An adjusted operatingmargin of 27.3% was a historical high for the company, he pointedout.

The “B” rating has not changed since the debt was issued inearly 2007 and the S&P outlook downgrade issued in November maybe related to much larger forces, Mitchell explained.

“Like everyone in the industry, we were impacted by thefinancial crisis with an increase in bank failures and mergeractivity,” Mitchell said, adding that “rising compliance costs,margin compression, reduced fee income alternatives and unceasingchannel proliferation will continue to challenge credit unions’business models.”

Recent debt problems in Europe have also had a magnified ratingseffect on many companies with leverage even when the leverage isrelatively inexpensive, as in Open Solutions' case, Mitchellspeculated. Still, the company and its private equity investorsobtained financing in 2007 at favorable rates, he added.

“To this day, a majority of our debt is at rates and terms thatare substantially below market,” he said. “We believe there are avariety of alternatives available to us when the time isappropriate to refine our capital structure and leveragemodel.”

Mitchell said Moody’s, a competing rating service, kept itsratings the same on Open Solutions “while citing many positivetrends that we ourselves have seen in the business.”

Those trends include the market’s response to the company’supgrades in its flagship DNA suite and the launch of DNAcreator andDNAappstore. The app store allows developers to create new revenuefor their employers by selling their software solutions to otherOpen Solutions customers. Since last May, more than 37,424individuals have visited the DNAappstore and over 240 apps havebeen downloaded. Open Solutions has 3,400 clients.

As for its core processing client base, Open Solutions acquiredseveral platforms during its growth through acquisition andadoption of its open platform. Recently, it has focused on its DNAproducts, which tend to be adopted by larger credit unions.

“We have seen run-off related to legacy products that we nolonger market and we recently sunset certain legacy platforms,”Mitchell said. “We remain committed to our go-forward product linesand we have no further plans to sunset any of our remaining legacyplatforms, namely TotalPlus. And, retention rates in these basesremain very strong.”

The “scalable and flexible” DNA platform will continue to beoffered to large and small credit unions.

“We’ve experienced strong sales momentum over the past 18 to 24months,” Mitchell said. “It’s a proven contemporary core solutionand the only enterprise core solution that can be extended by itsuser community.”

According to Callahan & Associates’ latest Tech@CU quarterlypublication, Open Solutions served approximately 305 credit unionsrepresenting $83.1 billion in assets in 2010, a 4% share based onthe number of credit unions.

“Most data processors, though, focus on specific-sizeinstitutions, or have products designed for different sized creditunions,” said Lydia Cole, director of industry analysis atCallahan.

Of the company’s 305 credit union core processing clients, 236were credit unions with more than $20 million in assets. OpenSolutions held a 6.7% market share in 2010, Cole said. In 2008 and2010, it was the fourth largest data processor serving creditunions with more than $20 million in 2010 and $25 million in assetsin 2008. Data for 2009 was not available.