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