NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to CA, Inc.'s senior notes offering. Fitch's ratings affect the new senior notes offering as well as $1.3 billion of existing debt and the $1 billion revolving credit facility (RCF). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
CA may use net proceeds from senior notes to repay $400 million under the revolving credit facility which was drawn subsequent to the quarter ending June 30, 2015. The remaining proceeds will be used for general corporate purposes.
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.
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 (83% of total revenue).
--Pro forma for the senior notes offering and revolver repayment, Fitch estimates total leverage (total debt-to-operating EBITDA) will be below 1.4x, and that CA will maintain total leverage below 2x over the intermediate term.
--CA continues to maintain conservative financial policies and strong credit protection measures for the rating.
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 88% 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. ES declined 4% over the LTM ending June 30, 2015 primarily due to FX headwinds. ES has a lower operating margin profile (approximately 11%) than MS (approximately 60%), 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.
--Annual FCF expected to exceed $400 million (post-dividend).
--Continued acquisition activity shift revenue mix away from declining legacy mainframe business.
--MS revenue decline in line with gradual secular mainframe market decline.
--Return to ES growth over the intermediate term following rationalization of legacy ES businesses and a mix shift to higher growth products and services including management cloud, DevOps and security.
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 supported by the new senior notes offering and approximately $2.8 billion of cash on hand ($2 billion offshore) as of June 30, 2015 and a $1 billion 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.
Pro forma debt would include CA's senior notes offering, in addition to existing debt of 1.3 billion, which primarily consists 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 currently rates CA as follows:
--Issuer Default Rating 'BBB+';
--Senior unsecured RCF 'BBB+';
--Senior unsecured notes 'BBB+'.
Date of last rating committee: June 25, 2015
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
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988754
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