RPT-Fitch Rates Rolta India's USD300m Notes Final 'BB-'
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July 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Rolta Americas LLC's USD300m 8.875% senior unsecured notes due 2019 a final rating of 'BB-'.
The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 15 July 2014. Rolta Americas LLC is a wholly owned subsidiary of Rolta India Limited (Rolta; BB-/Stable), a company with interests in information technology (IT) and geospatial services.
The notes are unconditionally and irrevocably guaranteed by Rolta, and are therefore rated at the same level as Rolta's foreign-currency senior unsecured rating of 'BB-'. The company will use about 75% of the proceeds of the notes to refinance its existing secured debt and the balance for general corporate purposes. The notes rank pari passu with the issuer's existing and future senior unsecured indebtedness. Rolta has changed its financial year-end from June 30 to March 31. The ratings factor in its financial results for the nine months ended March 2014 and our expectations for future performance.
USD300m bond's terms and conditions are similar to Rolta LLC's USD200m 10.75% guaranteed senior notes due 2018, except that in the USD300m notes the interest reserve account is not required, the fixed charge coverage ratio is lowered to 2.5x from 3.0x, and Rolta's guarantee on the notes is reduced to 1.5x the bond issuance amount from 2.0x.
These changes provide weaker comfort for bondholders in a stressed scenario. However, in light of the company's current profitability levels, ability to generate positive free cash flow (FCF), and rating level of 'BB-', these changes do not affect the ratings.
KEY RATING DRIVERS
Low Ratings Headroom: Rolta's funds flow from operations (FFO)-adjusted leverage of 3.7x at end-March 2014 (FY13: 4.1x) is close to the 4.0x threshold above which Fitch may consider a negative rating action. We expect its leverage to remain stable at around 3.5x during FY15-16 as a decline in capex/revenue to 12%-13% (9MFY14: 29%) would offset a likely deterioration in operating EBITDAR margin to 33%-35% (FY14: 37.3%) resulting in FCF margin of 5%-6% (9MFY14: -9%).
Likely Lower Profitability: Rolta is gradually shifting its business from a high-margin but capital-intensive model to a lower-margin, lower-capex model. Fitch expects annual capex to decrease to around INR3.5bn-4bn during FY15-16 in line with the company's plan to generate new products, the development costs of which would be expensed rather than capitalised. Management expects annual capex to fall to INR2bn during the same period. Rolta invested about INR45bn, or 56% of its revenue, during FY11-14 mostly to acquire intellectual property, intangible assets and to develop demonstrations and prototypes.
Changing Revenue Mix: Operating EBITDAR margin is also likely to fall due to a change in the product mix with a higher revenue contribution from Rolta's IT services business, which contributed 72% of FY14 revenue (FY09: 55%) and typically generates relatively lower operating EBITDAR margin of 28%-30%. The geospatial segment, which generates margins of 50%-55%, contributed 28% of FY14 revenue.
Reasonable Barriers to Entry: Rolta's 'BB-' ratings benefit from its niche-market strategy, established market position in engineering and geospatial services and innovative product portfolio in IT services, which are reasonably differentiated from traditional IT companies. Rolta's geospatial segment has high entry barriers with limited competition in geospatial services including 3D mapping, surveying and image processing to various federal and local governments, utilities, telcos, and infrastructure and defence agencies.
Improved Debt Structure: At end-July 2014, total debt of USD670m consists of USD200m 10.75% notes at Rolta LLC and USD300m 8.875% notes at Rolta Americas LLC. Rolta's bonds are subordinated to secured debt of around USD170m or 25% of total debt which is mainly commercial loans from Indian banks to operating companies. Fitch does not notch the unsecured notes one level down from the IDR given reasonable recovery on unsecured debt, growing cash generation and management's strategy to replace secured debt with unsecured debt.
Positive FCF starting FY15: Fitch expects Rolta to start generating positive FCF of INR1.5bn-2bn or 5%-6% of its revenue during FY15-16 as operating cash generation should be stable and capex lower. During FY15, Fitch forecasts that Rolta will generate about INR10bn of EBITDA, which would be sufficient to cover its interest and tax of INR3bn-4bn and a similar amount on capex. Rolta is likely to remain with its dividend policy of distributing 20% of its net income.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- FFO-adjusted leverage at above 4.0x. However, Fitch expects the company to maintain leverage below 4.0x during FY15-18, driven by a decrease in capex and stable FFO growth.
Rolta's IDRs are constrained by the small scale of its operations. As such, Fitch does not foresee any positive rating action over the medium term.