Fitch Affirms CA's IDR at 'BBB+'; Outlook Stable
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. A full list of ratings follows at the end of this press release.
Fitch's actions affect approximately $2.8 billion of total debt, including CA's undrawn $1 billion revolving credit facility (RCF).
KEY RATINGS DRIVERS
CA's ratings and Outlook reflect:
--Strong share position in mainframe (#2) and $5.4 billion addressable security (6% share) software markets, both of which benefit from high customer switching costs.
--Significant recurring revenue from software subscriptions and maintenance (90% of total revenue).
--Solid liquidity as of March 31, 2014 supported by i) $3.3 billion of cash (61% offshore); ii) $1 billion undrawn RCF expiring June 7, 2018; iii) strong and consistent free cash flow (FCF), primarily due to highly profitable recurring mainframe software maintenance revenue. Fitch expects CA's annual FCF (post-dividends) to exceed $500 million from fiscal 2015 - fiscal 2017.
--Conservative financial policies. CA continues to maintain solid credit protection measures for the rating, with gross leverage near 1x in fiscal 2014. Fitch expects total leverage (total debt-to-operating EBITDA) to remain below 1.5x and operating EBITDA-to-gross interest expense to exceed 20x.
Ratings concerns center on:
--Vast majority of operating profit continues to be derived from the Mainframe Solutions (MS) segment, which is expected to experience flat to modestly declining revenues through 2017. MS represents approximately 55% of total revenue but 90% of total segment operating profit due to the significant profit margin differential compared with Enterprise Solutions (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 2014, CA revamped its sales force and shifted R&D and marketing investments toward high growth markets within ES, specifically management cloud, DevOps and security. ES has a lower operating margin profile (8.7% in fiscal year 2014 [FY]) than MS (approximately 60%), but presents long-term revenue growth opportunities.
--Meaningfully larger competitors with superior financial flexibility.
Negative rating actions could occur if: i) revenues materially contract over a sustained period, signaling a faster than anticipated decline in the mainframe market that is not offset by ES or ii) operating profit margin declines, likely from a failure to adequately scale down mainframe-related costs.
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.
Fitch expects annual FCF of more than $500 million through 2017, driven by solid MS operating profitability. CA's FCF declined to $438 million in fiscal 2014 primarily due to a one-time change in tax policy that resulted in a $500 million cash tax payment. Pre-dividend FCF should continue to consistently exceed $1 billion, supported by high maintenance renewal rates. Fitch anticipates CA will use FCF to fund small technology-focused acquisitions and share repurchases, which totaled $500 million in FY 2014.
Total debt at Mach 31, 2014 was $1.8 billion and primarily consisted of:
--$500 million of 6.125% senior notes due 2014;
--$250 million of 2.875% senior notes due 2018;
--$750 million of 5.375% senior notes due 2019; and
--$250 million of 4.5% senior notes due 2023.
Fitch has affirmed CA's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage