NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of CA, Inc. (CA) at 'BBB+', including the long-term Issuer Default Rating (IDR). The Rating Outlook is Stable.
Fitch's actions affect approximately $2.3 billion of total debt, including CA's undrawn $1 billion revolving credit facility (RCF). A full list of ratings follows at the end of this press release.
Overall, the ratings and Outlook reflect CA's strong competitive position and leading market share within the mainframe market. The company's operating profile benefits from the relative stability, recurring revenue, high operating margin and free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends) characteristics attributable to its Mainframe Solutions (MS) business. Fitch believes the MS business will continue generating the majority of CA's FCF over the ratings horizon.
CA's MS segment revenues declined 2% during fiscal year 2015 (after adjusting for discontinued operations and currency). Fitch expects that MS segment revenue growth will remain flat to slightly negative (constant currency) during the intermediate term. An accelerated deterioration in the mainframe market is unlikely because most large enterprises are reluctant to switch their mission-critical operations from the mainframe environment to distributed or cloud-based alternatives due to high switching costs and the desired reliability of the mainframe environment for mission-critical operations.
CA's Enterprise Solutions (ES) segment continues to shift its revenue mix and strategic focus to higher growth products and services including management cloud, DevOps and security while rationalizing its legacy ES businesses. Fitch believes these growth markets will drive positive ES segment revenue growth by fiscal year 2017. These growth areas are more competitive and less profitable than CA's mainframe business which increases the risk that current FCF levels may not be maintained over the long term without sustained and profitable ES growth. However, Fitch is concerned that competition, pricing pressure and economic sensitivity may hamper expected revenue growth and fail to offset the gradual but long-term decline in the mainframe market leading to a weaker operating and credit profile.
KEY RATING DRIVERS
CA's ratings and Outlook reflect:
--Strong share position in mainframe and addressable security software markets, both of which benefit from high customer switching costs.
--Significant recurring revenue from software subscriptions and maintenance (84% of total revenue).
--Pro forma for the Rally acquisition, Fitch estimates total leverage (total debt-to-operating EBITDA) will be unchanged, and that CA will maintain total leverage below 1.5x over the intermediate term.
--CA continues to maintain conservative financial policies and strong credit protection measures for the rating, with total leverage (total debt-to-operating EBITDA) below 1x in fiscal 2015. Fitch expects total leverage to remain below 1.5x and operating EBITDA-to-gross interest expense to exceed 10x.
Ratings concerns center on:
--Vast majority of operating profit continues to be derived from the MS segment, which is expected to experience flat to modestly declining revenues through 2018. MS represents approximately 56% of total revenue but 89% of total segment operating profit because of the significant profit margin differential compared with ES.
An unexpected significant decline in customer mainframe usage would have a material adverse effect on CA's credit ratings in the absence of a significant improvement in ES.
--Weaker than expected revenue growth in ES. In fiscal 2015, ES declined 1% (constant currency) primarily due to weak sales execution and the timing of renewals. ES has a lower operating margin profile (11% in fiscal 2015) than MS (approximately 59%), but presents long-term revenue growth opportunities to offset declines in CA's legacy mainframe business.
--Meaningfully larger competitors with superior financial flexibility.
KEY ASSUMPTIONS
--Revenue growth in constant currency flat to slightly negative over the intermediate term.
--Domestic cash used to fund the Rally acquisition for approximately $480 million, net of cash acquired.
--Total leverage to remain below 1.5x and operating EBITDA-to-gross interest expense to exceed 10x.
--Annual FCF expected to exceed $400 million (post-dividend).
--Continued acquisition activity shift revenue mix away from declining legacy mainframe business.
RATING SENSITIVITIES
Negative rating actions would likely coincide with the adoption of a more aggressive capital allocation policy that increases total debt-to-EBITDA beyond 2x on a sustained basis or event-driven merger and acquisition activity that drives leverage above 2x in the absence of a creditable de-leveraging plan. Additionally, negative rating actions can stem from Fitch's expectation that CA's ES segment will not generate organic revenue growth during the ratings horizon indicating that the company's operating strategies have not captured sufficient traction to offset ongoing revenue declines within its legacy products and services.
Positive rating actions are unlikely in the intermediate term in the absence of meaningfully stronger contribution from ES that results in a more balanced revenue mix.
LIQUIDITY AND DEBT STRUCTURE
CA's liquidity position is solid and supported by $2.8 billion of cash on hand as of March 31, 2015 (69% offshore) and a $1 billion undrawn revolving credit facility set to expire on June 7, 2019. In addition, expected FCF generation, primarily due to the highly profitable and recurring mainframe software maintenance revenue, adds to the company's overall financial flexibility. Fitch expects CA's annual FCF to exceed $400 million (post-dividend) from fiscal 2016 to fiscal 2018.
Total debt at March 31, 2015 was approximately $1.3 billion and primarily consisted of:
--$250 million of 2.875% senior notes due 2018;
--$750 million of 5.375% senior notes due 2019;
--$250 million of 4.5% senior notes due 2023.
Fitch affirms CA's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured RCF at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987095
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987095
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.