NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a first time 'B' Long-Term Issuer Default Rating (IDR) to Infor (US), Inc. (Infor) and certain of its parent entities. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. Fitch's rating actions affect $6.5 billion of total funded debt.
The ratings are supported by Infor's large and diverse customer base, recurring revenue, broad product portfolio and diverse end market exposure. While Infor's business characteristics are consistent with investment grade software companies, the ratings are constrained by Fitch's expectations for gross leverage (total debt to operating EBITDA) to remain above 9.0x over the rating horizon and Infor's financial policies regarding debt-funded acquisitions and sponsor dividends. Fitch believes Infor is navigating the enterprise software industry's migration to the cloud with minimal business disruption, although the required investment to continue to keep pace should suppress operating and free cash flow (FCF) margin expansion in the near to medium term. Fitch believes customer expectations for more embedded analytics and consumer-grade enterprise software will increase the competitive intensity of the industry, and pressure enterprise software providers to invest in these capabilities to remain competitive.
KEY RATING DRIVERS
Stable Business Model: Infor generates 52% of its revenue from maintenance, which is highly stable and more resilient than license fees and professional services, and an additional 11% of revenue from subscription-based software-as-a-service (SaaS) applications. While the maintenance revenue mix should decline as customers migrate to SaaS, Fitch expects limited impact on total revenue and cash flow visibility due to the repeatable nature of subscription-based SaaS revenue.
Product and End Market Diversity: Infor offers a broad portfolio of horizontal and vertical software and middleware products across most major end markets. The company is meaningfully exposed to manufacturing, but lower beta public sector and healthcare markets help reduce performance volatility associated with more cyclical industries. Infor's diversified base of over 73,000 customers with none representing over 1% of total revenue further mitigates business risk.
High Leverage: Fitch views leverage as the primary driver of the difference in the IDR between Infor and Fitch-rated software peers with similar profitability and business risk profiles. Fitch estimates total leverage (total debt to operating EBITDA) of 9.8x (9.2x in constant currency) as of Jan. 31, 2016. Given Infor's acquisitive nature and private ownership, Fitch assumes leverage remains above 9.0x over the rating horizon. Fitch's expectations for leverage sustaining below 7x could result in a positive rating action.
Debt-funded M&A: Fitch's rating incorporates the expectation of additional M&A, which could delay deleveraging and add execution risk from integration of technology, personnel and operations. Acquisitions that do not adversely impact Infor's leverage profile but increase diversity or enhance product capabilities could benefit the rating.
Ample FCF: Fitch expects Infor to generate $200 million-$300 million of annual FCF at high single digit margins over the rating horizon. While strong relative to the rating category, Infor's FCF margin is lower than higher rated software peers due to its relatively higher interest expense, which amounts to about 12% of total revenue (over $300 million per year), versus higher rated software peers at about 1%-2% of total revenue.
Cloud Migration: Cloud adoption across software verticals continues apace, with less penetrated verticals such as financial management now seeing large scale adoptions. The associated shift in payment models and required operational investment are negatively impacting margins and FCF profiles for many issuers. While this dynamic will continue to impact Infor's margins and FCF over the near to medium term, Fitch believes Infor's ongoing cloud investment is appropriate, and critical for the company to maintain a strong competitive position.
Fitch's key assumptions within the rating case for Infor include:
--Low to mid-single digit revenue decline in fiscal year 2016 (FY16) due to declining license revenue and currency headwinds; low single digit organic revenue growth beginning FY17 as SaaS growth of greater than 20% more than offsets license revenue declines of about 10% per year; maintenance revenue flat to slightly declining due to lower license sales and SaaS conversions;
--EBITDA margin stabilizes and remains at about 25% over the rating horizon as the impact of a higher SaaS revenue mix hits an inflection point;
--$200 million-$300 million of annual FCF at high single digit margins.
Positive Rating Action: Positive action could result from Fitch's expectations for leverage to sustain below 7.0x. Given Infor's private equity ownership, Fitch does not expect this to occur until the company begins preparing for an IPO.
Negative Rating Action: Indications of increased refinancing risk as debt maturities approach, potentially due to a failure to delever to a market clearing level 12-18 months prior to the $3.7 billion of 2020 maturities could result in negative action. The ratings could also come under pressure if FCF margins approach 5%, potentially due to higher than expected licensing revenue declines without an offsetting impact from SaaS, or failure to stabilize EBITDA margins.
Liquidity as of Jan. 31, 2016 was sufficient, based on Fitch's expectations for annual FCF of $200 million-$300 million over the rating horizon and $138 million available under a committed $150 million revolving credit facility. Infor maintains a significant overseas cash balance, with $451.4 million of its total $521.9 million of cash and cash equivalents held outside of the U.S. Infor has no significant maturities until 2020 when $3.7 billion of total debt matures.
Total funded debt as of Jan. 31, 2016 is $6.5 billion and consists of:
--$150 million senior secured revolving credit facility due 2017 (undrawn);
--$2.454 billion senior secured tranche B-5 term loan due 2020;
--$463 million senior secured tranche B-3 term loan due 2020;
--$366 million senior secured Euro-B term loan due 2020;
--$500 million 5.750% senior secured notes due 2020;
--$7.3 million of capital leases;
--$1.630 billion 6.500% senior unsecured notes due 2022;
--$379 million 5.750% senior unsecured notes due 2022;
--$750 million 7.125% holdco contingent cash pay notes due 2021.
FULL LIST OF RATING ACTIONS
Fitch assigns the following ratings:
Infor (US), Inc.
--Long-Term Issuer Default Rating (IDR) 'B';
--Senior secured credit facilities 'BB/RR1';
--Senior secured notes 'BB/RR1';
--Senior unsecured notes 'CCC+/RR6'.
Infor Software Parent, Inc. and Infor Software Parent, LLC (Co-borrowers)
--Long-Term IDR 'B';
--Holdco contingent cash pay notes 'CCC/RR6'.
The Rating Outlook is Stable.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Consolidation of $750 million contingent cash pay notes and related interest and dividend adjustments onto Infor (US), Inc.'s financial statements.
Date of Relevant Rating Committee: May 6, 2016.
Additional information is available on www.fitchratings.com.
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Dodd-Frank Rating Information Disclosure Form