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Fitch Rates FIS's Proposed Senior Unsecured Note Offering at 'BBB-'
April 10, 2013 / 3:20 PM / 4 years ago

Fitch Rates FIS's Proposed Senior Unsecured Note Offering at 'BBB-'

(The following statement was released by the rating agency) NEW YORK, April 10 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Fidelity National Information Services, Inc.'s (FIS) proposed offering of senior unsecured notes. Proceeds from the offering are expected to be used to redeem up to $750 million in 7.625% senior unsecured notes due 2017. Fitch does not expect this offering to result in any material increase in leverage. KEY RATING DRIVERS: FIS has adopted a more conservative approach to capital allocation in recent years as its business strategy has moved beyond its acquisition growth phase. Historically the company actively pursued debt-financed acquisitions in addition to a large debt-financed share repurchase in 2010. Going forward, Fitch believes that acquisitions will be limited to small niche additions to the business, funded by cash from operations. Fitch expects that FIS will continue to focus on shareholder returns but that share repurchases will not result in significant leveraging events beyond levels contemplated in the rating. Fitch estimates leverage (total debt / operating EBITDA) at 2.4x (or 2.7x when adjusted for operating leases). Fitch would expect leverage to remain near 2.5x given the current rating category with the potential for modest temporary spikes. Alternatively, free cash flow before dividends would be expected to remain above 10% of total adjusted debt (14.8% currently). FIS's strong free cash flow profile in recent years could be supportive of positive rating action although the company's meaningful dividend policy at least partially negates that credit strength. FIS's ratings are supported by many qualitative factors which also drive significant event risk. Specifically, FIS competes in a relatively stable market with high barriers to entry, significant recurring revenue and long-term contracts. The company's strong profitability (EBITDA margins of 30% in 2012) and free cash flow generation are evidence of this position in the marketplace. The company has in the past viewed these characteristics as a platform for leveraging events and has also been the target of prior leveraged buyout inquiries. Fitch believes that a leveraged recap or leveraged buyout event remains the biggest risk for the credit. However, a more conservative approach to capital allocation from management and recent significant increase in the dividend rate, Fitch believes, reduces the probability of such an event. While higher dividends are not generally considered credit friendly, Fitch believes that for FIS, this should reduce the potential for activist shareholder pressure in the future. FIS's annual dividend was raised from $0.20 per share to $0.80 per share in January 2012 and $0.88 per share for 2013. This represents a 2.4% dividend yield based on the current stock price. Fitch believes this dividend level should support the stock in the future, which would in theory partially mitigate shareholder interest in increasing leverage at the company. Rating strengths include the following: --Stable end-demand; --Strong diversification, with increasing international diversification although highly dependent on small- and mid-tier banks; --High switching costs. Rating concerns include: --History of debt M&A and shareholder-friendly actions; --High fixed-cost business; --Potential regulatory changes; --Increasing competition from non-traditional competitors such as IBM and Oracle which have greater resources. Liquidity as of Dec. 31, 2012 was solid with cash of $518 million and $1 billion available under a $1.15 billion senior unsecured revolving credit facility, expiring March 2017. Additionally, free cash flow has averaged near $700 million annually over the past three years. Total debt as of Dec. 31, 2012 was $4.4 billion. In January 2013, FIS repaid its $250 million unsecured term loan maturing 2014 with borrowings from its revolving credit facility. Pro forma for this action, the debt balance consisted principally of the following: --$376 million outstanding under the aforementioned senior unsecured revolving credit facility (reducing availability to $773 million); --$2 billion outstanding under a senior unsecured term loan-A maturing March 2017; --$750 million in 7.625% senior unsecured notes due July 2017; --$500 million in 7.875% senior unsecured notes due July 2020; and --$700 million in 5.0% senior unsecured notes due March 2022. RATING SENSITIVITIES: Positive: Future developments that may, individually or collectively, lead to positive rating action include: --Continued growth in the business driven by cross-selling of products and services across the domestic customer base, which increases FIS's value to customers, as well as growth in the international business which provides further diversification. --Continued moderation of debt-financed acquisitions and share repurchases coupled with management's commitment to maintain a reasonably conservative capital structure. Negative: Future developments that may, individually or collectively, lead to negative rating action include: --More aggressive capital distribution to shareholders, particularly if these actions are in response to changes in equity valuation; --Significant changes to the structure of the financial services sector which could lead to the loss or consolidation of a significant portion of FIS's customer base. Fitch currently rates FIS as follows: --IDR 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'; --Senior unsecured term loans 'BBB-'; and --Senior unsecured notes 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Jason Paraschac, CFA Senior Director +1-212-908-0746 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Jamie Rizzo, CFA Managing Director +1-212-908-0548 Chairperson: John M. Witt, CFA Senior Director +1-212-908-0673 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology', dated Aug. 8, 2012; --'Evaluating Corporate Governance', dated Dec. 12, 2012; --'Rating Technology Companies,' dated Aug. 9, 2012. Applicable Criteria and Related Research Rating Technology Companies here Evaluating Corporate Governance here Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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