TEXT-S&P raises Total System Services to 'BBB+'

Fri Jun 22, 2012 2:15pm EDT

June 22 - Overview
     -- U.S. card and payment processing service provider Total System 
Services Inc. (TSYS) continues to increase its organic revenues in the
mid- to high-single digits, including year-over-year performance in its latest
quarter ended March 2012.
     -- We are raising our rating on TSYS to 'BBB+' from 'BBB', reflecting the 
company's prospects for revenue growth, supported by favorable payment 
processing industry trends, as well as our expectation that TSYS will continue 
to operate with leverage appropriate for the rating.
     -- Our stable outlook reflects the company's defensible market position 
and good revenue predictability in growing payment processing markets.

Rating Action
On June 22, 2012, Standard & Poor's Rating Services raised its rating on 
Columbus, Ga.-based Total System Services Inc. (TSYS) to 'BBB+' from 'BBB', 
reflecting the company's prospects for revenue growth, underpinned by 
favorable payment processing sector trends, as well as our expectation that 
leverage will be managed within a framework of less than 2x. The rating 
outlook is stable.

Rationale
The rating reflects the company's "satisfactory" business risk profile and 
"intermediate" financial risk profile. Our expectation is that TSYS' leading 
market positions in growing card issuer and merchant payment processing 
markets will enable it to increase its profitability and maintain a moderate 
leverage profile of 2x or less. We also expect TSYS will maintain an 
"adequate" liquidity profile. 

With latest-12-month revenues through March 2012 of about $1.8 billion, TSYS' 
satisfactory business profile reflects its defensible market position as one 
of the leading providers of card processing services for financial 
institutions and retailers, as well as its growing, yet relatively smaller, 
market position as a merchant payment processor. TSYS maintains a market 
position as the 10th-largest U.S. merchant processor, with about 2% market 
share of merchant transactions as measured by Nilson for 2011. We expect TSYS' 
key competitive differentiators of technology and process efficiency, as well 
as the continued market shift toward electronic payments, support prospects 
for the company to achieve at least low- to mid-single-digit revenue growth. 

At the same time, we expect TSYS' North American market for outsourced card 
issuing services will continue to experience pricing pressure and low revenue 
growth, due to financial institution client concentration, as well as cyclical 
performance impacted by consumer credit conditions. Notwithstanding, we 
anticipate TSYS will achieve stronger revenue and earnings growth in merchant 
processing relative to card issuing, given consumer migration to electronic 
payments, customer diversification, and prospects for growth through 
acquisition. 

Considering TSYS' business segment dynamics, we expect the company's domestic 
merchant processing business will grow to represent over 35% of its segment 
revenues before reimbursable items over the next two years from about 25% at 
present. We note that TSYS' revenues before items reimbursable to clients 
(primarily postage) and its EBITDA are at present primarily generated by its 
North American card-issuing services business (about 51% of segment revenues, 
59% of EBITDA for the March 2012 quarter), and to a lesser degree by its 
domestic merchant processing services business (about 25% of revenue, 29% of 
EBITDA) and international businesses (about 24% of revenue, 12% of EBITDA).

We expect TSYS' revenue from its international businesses will grow at least 
in the low-single digits, given the company's low exposure to European markets 
other than the U.K. and given opportunities to increase business penetration 
in emerging markets.  

We also expect that TSYS' cost-cutting initiatives will facilitate earnings 
and cash flow improvement over the next two years. Specifically, we expect the 
company's plan to consolidate service offerings onto its primary operating 
platform within international markets will enable it to preserve adjusted 
EBITDA margins of about 30% in the future.

TSYS' intermediate financial profile incorporates currently modest leverage 
for the rating and our expectation that the company will continue to operate 
with leverage of less than 2x. Although adjusted total debt to EBITDA is 
currently at 0.9x, our rating incorporates our expectation that TSYS will 
adopt a slightly more aggressive capital structure in the near term, given our 
expectation that some of the merchant processing growth will come through 
acquisition. A debt threshold of 2x would be appropriate at the current 
rating, enabling the company to pursue midsized acquisitions and fund 
potential share repurchases. We expect capital expenditures to continue to 
represent a relatively modest 6% of revenues in the future.

Liquidity
TSYS has adequate liquidity, with sources of cash likely to significantly 
exceed uses for the next 12 to 24 months. Cash sources include cash and 
unrestricted short-term investment balances of $371 million as of March 31, 
2012, and expected free cash flow before dividends in excess of $300 million 
per year. We expect uses to include common dividends of about $20 million per 
quarter. We also expect TSYS' existing term loan ($168 million outstanding as 
of March 31, 2012) and revolving credit facility due December 2012 will be 
refinanced in the near-term on comparably similar terms.

Relevant aspects of TSYS' liquidity, in our view, are:
     -- We see coverage of uses in excess of 1.5x for the next two years.
     -- We expect net sources would be positive in the near term, even with a 
30% decline in EBITDA from fiscal 2011 levels.
     -- Although we expect potential acquisitions to be moderate in size, TSYS 
has some room within its leverage profile to absorb incremental debt.
     -- We expect TSYS to fund share repurchases from discretionary cash flow. 
     -- We also expect the company will maintain ample headroom under credit 
agreement covenants, including the agreement's 3x maximum total leverage 
covenant.
     -- We expect the company's $252 million revolving credit facility 
expiring December 2012 will be recast in 2012 as a source of long-term 
liquidity.

Outlook
Our stable rating outlook reflects our expectation that TSYS' defensible 
market position and good revenue predictability will continue to result in 
growing profitability and strong free cash flow in excess of $250 million 
annually. The stable outlook also reflects the capacity for potential 
moderate, debt-financed acquisition activity and shareholder-friendly 
initiatives. Given the company's moderate acquisition spending plans, an 
upgrade is unlikely at present. Over the longer term, we could raise TSYS' 
ratings were the company to achieve consistent revenue and profit growth in 
step with its 2014 growth plan, with leverage sustained at 1.5x or less. 

Conversely, we could lower the rating if TSYS adopted a more aggressive 
financial policy that resulted in a weaker financial risk profile than we 
currently anticipate, with leverage exceeding 2x on a sustained basis.

Related Criteria And Research
     -- Top 10 Investor Questions: How Will The Global Technology Industry 
Fare Amid An Economy In Flux?, April 26, 2012
     -- Global Technology Ratings Trend Shifts To Negative In The First 
Quarter, April 11, 2012
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 
29, 2012
     -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Global 
High Technology Industry, Oct. 15, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Upgraded
                                        To                 From
Total System Services Inc.
 Corporate Credit Rating                BBB+/Stable/--     BBB/Stable/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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