-- Genpact Ltd. has a "fair" business risk profile and an "intermediate" financial risk profile.
-- We are assigning our 'BB+' corporate credit rating to Genpact, a U.S. listed business process outsourcing service provider.
-- We are also assigning our 'BB+' rating to the company's proposed $925 million senior secured bank loan.
-- The stable outlook reflects our expectation that the company will sustain its operating performance and maintain financial discipline despite a one-time large dividend payout.
SINGAPORE (Standard & Poor's) Aug. 7, 2012--Standard & Poor's Ratings Services said today that it had assigned its 'BB+' long-term corporate credit rating to business process outsourcing (BPO) service provider Genpact Ltd. The outlook is stable.
At the same time, we assigned our 'BB+' issue rating to the company's proposed $925 million senior secured bank loan facility including $675 million seven-year term loan and $250 million five-year revolver credit facility. We also assigned our recovery rating of '3' to the loan to indicate our expectation of meaningful (50%-70%) recovery in the event of default.
The rating on the bank loan depends on our review of the final issuance documentation.
"The rating on Genpact reflects the highly fragmented and increasingly competitive BPO industry. It also reflects the company's significant segment concentration and high exposure to U.S.-based clients, whose outsourcing budgets and spending remain uncertain," said Standard & Poor's credit analyst Abhishek Dangra. "We also view the change in Genpact's financial policies to increase its leverage in an asset-light industry as a rating weakness. The company announced a large one-time special dividend. Genpact's good market position in finance and accounting services, higher value-added offerings, and stronger EBITDA margins compared with most peers' moderate these weaknesses."
The intensifying competition in an already fragmented market characterizes the BPO industry. Competition comes from both domestic and international BPO service providers and larger integrated information technology (IT) players with growing BPO operations. Uncertainty surrounds outsourcing budgets and spending, particularly in the key markets of the U.S. and Europe, due to an economic slowdown and indirect effects of fiscal tightening. Genpact derives over 70% of its revenues from the U.S.
Genpact is exposed to high concentration in the banking, financial services, and insurance (BFSI) vertical, which accounts for about 48% of the company's revenues. We view Genpact's client concentration risk as moderate despite the company's top 10 clients (including General Electric Co.: GE; AA+/Stable/A-1+) contributing more than 50% of its revenues. This is based on diversified offerings to different entities of GE, which together account for 30% of revenues.
In our view, Genpact has an "intermediate" financial risk profile. We expect the company to strictly adhere to its financial policies (of a net debt-to-EBITDA ratio of 2x) and proposed financial covenants under the oversight of an independent board. We also expect Genpact to restrict its special dividend to 2012 as planned. We view Genpact's liquidity is "adequate", as defined in our criteria.
Genpact benefits from it market position as one of the leading players providing financial and accounting outsourcing services. We believe the company's higher-value added offerings across segments compared with peers is a competitive advantage.
"The stable outlook reflects our expectation that Genpact will sustain its operating performance; generating about 20% EBITDA margins," said Mr. Dangra. We also expect the company to maintain financial discipline, despite a one-time large dividend payout and potential mid-sized acquisitions.
We may lower the rating if the company's FFO-to-debt ratio falls below 30% and the ratio of adjusted debt to EBITDA increases to more than 2.75x. This may happen because of: (1) Genpact following a more shareholder friendly financial policy leading to further dividend payments or share buybacks; or (2) the company's adjusted EBITDA margin dropping sharply to below 15%.
We believe an upgrade is unlikely over the next 12-18 months. Nevertheless, we may raise the rating if Genpact significantly improves its scale of operations, increasing the business diversity by reducing dependence on the BFSI vertical. The company should sustain its margins and maintain its financial ratios and financial policy in line with our current expectations.
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