TEXT-Fitch affirms Accenture's IDR at 'A+';outlook stable

Tue Nov 20, 2012 8:32am EST

Nov 20 - Fitch Ratings has affirmed the ratings of Accenture plc (Accenture) and subsidiaries as follows:

Accenture

--Long-term Issuer Default Rating (IDR) at 'A+'.

Accenture International Capital SCA

--Long-term IDR at 'A+';

--Senior unsecured bank credit facility at 'A+'.

Accenture Capital Inc.

--Long-term IDR at 'A+';

--Senior unsecured bank credit facility at 'A+'.

The Rating Outlook is Stable. Approximately $1 billion of debt, consisting of an undrawn credit facility, is affected by Fitch's action.

The Ratings and Outlook are supported by Accenture's:

--Strong balance sheet with negligible debt;

--Solid liquidity supported by significant and consistent free cash flow (FCF; about $2 billion plus), despite cyclical demand associated with the consulting and systems integration (C&SI) business. Fitch projects $2.5 - $3 billion of free cash flow (post dividends) in fiscal 2013 compared with $2.9 billion in fiscal 2012;

--Revenue stability from established, long-term client relationships and industry expertise, resulting in a significant percentage of new contracts awarded on a sole-sourced basis;

--Strong market position in targeted IT service groups with solid projected long-term market growth rates, especially application and business process outsourcing, supported by the company's significant and diversified offshore delivery capability;

--Recurring revenue provided by longer-term outsourcing contracts (nearly 44% of net revenue) and less capital-intensive business model relative to its peers;

--Diversified revenue base from a customer, industry, geography and service line offering perspective.

Ratings concerns center on:

--Potential for sizable debt-funded share repurchases and/or acquisitions. However, Fitch believes Accenture has considerable financial flexibility at the current rating due to its strong balance sheet and consistent FCF.

--Pricing pressures due to intense competition from multinational, offshore (primarily India-based) and niche IT Services providers.

--Long-term effect of software as a service (SaaS) adoption on demand for traditional systems integration services, particularly enterprise resource planning software. Fitch believes total IT services revenue generated from SaaS will likely be less than traditional software implementations over the software's entire life cycle, despite initial revenue from integrating SaaS into a client's existing systems.

--Threat of new market entrants in the traditional outsourcing market due to increasing adoption of cloud computing.

As of Aug. 31, 2012, Accenture's liquidity was strong, consisting of $6.6 billion of cash and investments, an undrawn $1 billion revolving line of credit maturing 2016 and $2.9 billion of FCF in the latest 12 months. The credit facility agreement requires the company to maintain a consolidated leverage ratio (debt/EBITDA) of less than 1.75 times (x).

Fitch believes the company maintains greater flexibility in accessing its cash due to certain structural considerations taken as part of the 2001 reorganization that continue with Accenture's reincorporation in Ireland. Fitch anticipates free cash flow remaining after cash dividends will continue to be utilized primarily for share repurchases and acquisitions.

As of Aug. 31, 2012, Accenture had negligible outstanding debt as the company generates ample cash flow to internally fund share repurchases, cash dividends and relatively modest acquisition activity to date. Total debt was less than $0.1 million on Aug. 31, 2011 compared with $4.4 million in the prior year.

The company does have off-balance sheet debt in the form of significant operating lease commitments since it does not own any of its real estate as part of its 'asset-light' strategy. In the past five fiscal years, Fitch estimates total adjusted debt to EBITDAR ranged from 0.9x - 1x and was 0.9x in the fiscal year ended Aug. 31, 2012.

WHAT COULD TRIGGER A RATING ACTION

Negative: Future developments that may lead to a negative rating action include:

--Significant debt-financed acquisitions and/or share repurchases that result in a material deterioration in credit protection measures.

Positive: Upside movement in the ratings is unlikely in the near term.