GLOBAL MARKETS-Italian bank worries leak into second week
* Speculation of early Italian election after weekend reports
Overview -- San Jose, Calif.-based communications equipment company VeriFone Systems Inc. reported 8% year-over-year organic revenue growth in the quarter ended October 2012. -- We expect that the company will continue to increase its presence in global merchant payment systems markets and post strong organic revenue growth over the coming year, with leverage contained under 3x. -- We are revising our rating outlook on the company to positive from stable, and affirming our ratings, including the 'BB-' corporate credit rating. -- The positive outlook reflects the company's favorable trends and prospects for a sustained reduction in leverage. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services revised its rating outlook on San Jose, Calif.-based VeriFone Systems Inc. to positive from stable. At the same time, we affirmed our ratings on the company, including the 'BB-' corporate credit rating. Rationale The outlook revision reflects the company's strong revenue growth, moderating leverage, and stable earnings prospects over the coming year, supported by its leading presence in global merchant payment systems markets and progress integrating recent acquisitions. Our ratings on VeriFone Systems Inc. reflects the company's leading global market share in growing merchant payment systems markets, partially offset by the threat of nascent rival payment technologies, resulting in our characterization of its business risk profile as "fair". In our assessment, the company's leverage of about 3x results in a "significant" financial risk profile. We expect the company will maintain its "adequate" liquidity over the coming year and we have assessed its management and governance as "fair". The fair business risk profile reflects the company's relatively narrow yet solid market position in payment processing hardware and related services, as well as its need to respond to evolving technology and regulatory standards. VeriFone's total addressable market continues to expand, with new devices and mobile payment solutions offering opportunities for meaningful growth. An increasing portion of the company's revenues are from recurring, service-based fees, which should continue to contribute to revenue stability. Operating performance has been strong, with organic revenue growth exceeding 8% year-over-year in its fiscal fourth quarter in constant currency, as well as 14% its fiscal year ended October 2012. We expect the expansion of emerging markets and development of new payment products will support low-double digit revenue growth prospects over the coming 12 months. The company's EBITDA margin was about 25% for the last 12 months ended October 2012, an improvement from an 18% margin in 2010. VeriFone's continuing shift toward service-based revenues, combined with growth-related operating efficiencies, should support consistent operating performance over the coming year. VeriFone's significant financial risk profile reflects leverage of about 3x as of October 2012, adjusted for operating leases. We expect EBITDA growth and a moderation in acquisition integration costs should result in leverage below 3x within the next year. We note that VeriFone acquired Point and Hypercom in October 2011 and January 2012, respectively. Over the coming year, we expect Verifone will pursue tuck-in acquisition targets and may commence share repurchase spending within a 3x leverage framework. We note that the company's credit facility agreement currently limits restricted payments to within a 3x leverage framework, with modest allowances. Liquidity VeriFone has adequate liquidity. The company ended the October 2012 quarter with $454 million of cash as well as more than $200 million of availability under its $425 million revolving credit facility expiring 2016. Most of the cash is held overseas and is subject to repatriation tax. Liquidity sources also include the company's free cash flow, which we expect will amount to about $300 million over the coming year. Our assessment of VeriFone's liquidity profile also incorporates the following expectations, assumptions, and factors: -- We expect sources of liquidity to exceed uses by 1.2x or more over the next 12 to 24 months. -- We expect net sources would be positive in the near term, even with a 15% decline in estimated EBITDA in the next 12 months. -- Because of the company's consistently positive discretionary cash flow, we believe it has moderate capacity to absorb low-probability, high-impact shocks at the current rating level. However, this is partially offset by potential acquisition and share repurchase spending. Recovery analysis The rating on VeriFone's senior secured credit facilities is 'BB' (one notch higher than the corporate credit rating). The recovery rating on these facilities is currently '2', indicating our expectation of substantial (70% to 90%) recovery for lenders in the event of a payment default. (For more detail, please see our updated recovery report on VeriFone to be published on RatingsDirect. Outlook The positive outlook reflects the company's favorable operating trends and prospects, supported by its increasing presence in global merchant payment systems markets. If the company is able to maintain organic revenue growth and earnings stability, and a commitment to contain leverage to 3x or less, we could raise our ratings on the company. Conversely, we could revise the outlook to stable were the company's operating performance to unexpectedly weaken from current levels or if more aggressive pursuit of acquisitions or share repurchases resulted in sustained leverage in excess of 3x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed; Recovery Ratings Unchanged; Outlook Action To From VeriFone Systems Inc. Corporate Credit Rating BB-/Positive/ BB-/Stable/-- VeriFone Inc. Corporate Credit Rating BB-/Positive/-- BB-/Stable/-- Senior Secured BB BB Recovery Rating 2 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
* Speculation of early Italian election after weekend reports
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