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.
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.
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
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.
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
-- We expect the company's $252 million revolving credit facility
expiring December 2012 will be recast in 2012 as a source of long-term
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.
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Total System Services Inc.
Corporate Credit Rating BBB+/Stable/-- BBB/Stable/--
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