Fitch Revises SunGard Data Systems' Outlook to Negative; Affirms 'B+' IDR

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has revised SunGard Data System's (Sungard) Rating Outlook to Negative from Stable and affirmed the following ratings:

--Issuer Default Rating (IDR) at 'B+';

--$250 million 3.75% senior notes due 2009 at 'B+/RR4';

--$250 million 4.875% senior notes due 2014 at 'B+/RR4';

--$1.6 billion 9.125% senior unsecured notes due 2013 at 'B/RR5';

--$500 million 10.625% senior unsecured notes due 2015 at 'B/RR5';

--$1 billion 10.25% senior subordinated notes due 2015 at 'B-/RR6'.

Due to lower valuation and recovery, the following ratings have been downgraded:

--$1 billion senior secured revolving credit facility due 2011 to 'BB/RR2' from 'BB+/RR1';

--$4.8 billion senior secured term loan due 2014 to 'BB/RR2' from 'BB+/RR1'.

The rating action reflects Fitch's expectations that:

--SunGard's Financial Services (FS) segment's revenue (54% of total for the twelve months ended Sept. 30, 2008) and profitability may erode well into 2009, negatively affecting the company's credit protection measures. The current turmoil in the global financial markets is significantly worse than previously anticipated, and has created a high degree of uncertainty around near-term financial performance. Revenue weakness could result from lower or delayed orders, potential reductions in the customer base, or customers renegotiating maturing contracts at reduced terms.

--A longer and more severe economic downturn could have a larger negative impact on SunGard's profitability at its Availability Services (AS), Higher Education (HE), and Public Sector (PS) than previously expected, reducing those segments' ability to moderate the impact of a decline at FS. While SunGard's diverse businesses, long-term contracts and largely recurring revenue base generally enable the company to withstand macroeconomic pressures, Fitch believes that the recent slowdown in organic revenue growth at HE and PS could intensify over the next several quarters amid a significantly weaker economy. Fitch believes that AS will maintain fairly consistent revenue growth, although margin erosion could intensify due to increased pricing pressure.

--Limited revenue growth and profitability erosion could result in meaningfully slower deleveraging over the medium term. Fitch estimates that total debt/LTM EBITDA was 6.0 times (x) at 3Q08, versus 5.3x at 2Q08. This was driven by a $1.1 billion increase in debt in the quarter, which will fund the estimated $619 million GLTrade acquisition, a $250 million January 2009 maturity, and the $250 million reduction in the company's off balance sheet AR securitization facility. Current ratings incorporate leverage within a 5.0x-5.5x range over the intermediate term, with the expectation that acquisition activity could result in leverage above this range on a short-term basis, with subsequent deleveraging via EBITDA growth. Repayment of the January 2009 maturity and consolidation of GLTrade EBITDA will reduce leverage over the near term.

SunGard's recurring revenue model, driven by long term contracts and significant switching costs, enable the company to generate consistent annual free cash flow of approximately $200-$300 million. The company uses this cash for small, tuck-in acquisitions to augment mature market organic growth rates. A reduction in sales and/or profitability due to a severe and prolonged economic downturn would likely drive a commensurate decline in free cash flow, hindering SunGard's ability to grow via acquisitions. Additionally, should lower free cash flow result in a material increase in debt-financed acquisitions, further ratings pressure could develop.

The ratings could be downgraded if:

--The FS business experiences a steep decline in sales and/or profitability, driven by continued reduction of new contracts and/or customer attrition;

-Significant further decline in operating margins, driven by pricing pressure on new or renewed contracts, or lack of commensurate operating expense reduction in the event of lower revenue growth;

-Absence of deleveraging from current levels via EBITDA growth over the medium term.

The ratings could stabilize if:

--Improved visibility occurs in the FS segment, with expectations that it will withstand the ongoing turmoil and consolidation in the financial markets, without experiencing sharp top line declines and significant customer attrition;

--EBITDA growth at AS, HE and PS offsets the impact of a potential decline in FS on SunGard's overall profitability;

--Material deleveraging occurs over the near term, via EBITDA growth or debt reduction.

As of Sept. 30, 2008, Fitch believes SunGard's liquidity position was sufficient and supported by approximately $1.6 billion of cash and $603 million available under its $1 billion senior secured revolving credit facility expiring 2011 (net of $26 million of letters of credit outstanding and, therefore, unavailable for borrowings). The company's accounts receivable (AR) securitization program, which had $448 million drawn at Sept. 30, was reduced to $200 million from $450 million in October 2008; SunGard will repay the $248 million in borrowings with cash from collections. Additionally, for the twelve months ended Sept. 30, 2008, the company generated $363 million of free cash flow, excluding cash generated by amounts drawn under the AR facility.

As of Sept. 30, 2008, total on-balance-sheet debt was approximately $8.8 billion and consisted primarily of: $4.8 billion of senior secured term loans expiring 2014; $371 million drawn under the senior secured revolving credit facility expiring 2011; approximately $250 million of 3.75% senior notes due 2009, which Fitch anticipates the company will repay with cash on hand; approximately $250 million of 4.875% senior notes due 2014; $1.6 billion of 9.125% senior unsecured notes due 2013; $500 million of 10.625% senior unsecured notes due 2015 and $1 billion of 10.25% senior subordinated notes due 2015. Debt amortization requirements under the term loans are 1% of the outstanding amount annually.

The Recovery Ratings (RRs) reflect Fitch's belief that SunGard would be reorganized rather than liquidated in a bankruptcy scenario, given Fitch's estimates that the company's ongoing concern value of $6.3 billion is significantly higher than its projected liquidation value, due mostly to the significant value associated with SunGard's intangible assets. In estimating ongoing concern value, Fitch reduced the valuation multiple to 6x from the previous 7x, attributing recent valuation contraction among comparable companies. Fitch discounts SunGard's normalized operating EBITDA by 30%, corresponding to the EBITDA level that would breach the company's financial covenants.

After reductions for administrative and cooperative claims, Fitch arrives at an adjusted reorganization value of approximately $5.7 billion. Based upon these assumptions, the senior secured debt, including $1 billion revolving credit, and $4.8 billion of term loan facilities recover approximately 87%, resulting in 'RR2' ratings for both tranches of debt. The senior notes' 'RR4' recovery rating reflects the partial security these notes received during the leveraged buyout process and Fitch's belief that the secured bank debt is in a superior position due to its right to the company's intellectual property. The 'RR5' recovery rating for the $2.1 billion senior unsecured debt reflects Fitch's estimate that 11%-30% recovery is reasonable, while the 'RR6' recovery rating for the $1 billion of subordinated debt reflects Fitch's belief that negligible recovery would be achievable due to its deep subordination to other securities in the capital structure. The analysis is proforma for the redemption of the January 2009 senior notes.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.