-- Genpact Ltd. has a "fair" business risk profile and an
"intermediate" financial risk profile.
-- We are assigning our 'BB+' corporate credit rating to
Genpact, a U.S. listed business process outsourcing service
-- We are also assigning our 'BB+' rating to the company's
proposed $925 million senior secured bank loan.
-- The stable outlook reflects our expectation that the
company will sustain its operating performance and maintain
financial discipline despite a one-time large dividend payout.
On Aug. 7, 2012, Standard & Poor's Ratings Services assigned
its 'BB+' long-term corporate credit rating to business process
outsourcing (BPO) service provider Genpact Ltd. The outlook is
At the same time, we assigned our 'BB+' issue rating to the
company's proposed $925 million senior secured bank loan
facility including a $675 million seven-year term loan and a
$250 million five-year revolver credit facility. We also
assigned our recovery rating of '3' to the loan to indicate our
expectation of meaningful (50%-70%) recovery in the event of
The rating on the bank loan depends on our review of the
final issuance documentation.
The rating on Genpact reflects the highly fragmented and
increasingly competitive BPO industry. It also reflects the
company's significant segment concentration and high exposure to
U.S.-based clients, whose outsourcing budgets and spending
remain uncertain. In addition, we view the change in Genpact's
financial policies to increase its leverage in an asset-light
industry as a rating weakness. The company announced a large
one-time special dividend for 2012. Genpact's good market
position in finance and accounting services, higher value-added
offerings, and stronger EBITDA margins compared with most peers'
moderate these weaknesses.
The intensifying competition in an already fragmented market
characterizes the BPO industry. Competition comes from both
domestic and international BPO service providers and larger
integrated information technology (IT) players with growing BPO
operations. Uncertainty surrounds outsourcing budgets and
spending, particularly in the key markets of the U.S. and
Europe, due to an economic slowdown and indirect effects of
fiscal tightening. Genpact derives over 70% of its revenues from
Genpact is exposed to high concentration in the banking,
financial services, and insurance (BFSI) vertical. This segment
accounts for about 48% of the company's revenues after adjusting
for its acquisition of Headstrong Corp. in 2011. Nevertheless,
we note that Genpact estimates that 50% of the services it
provides (such as for finance and accounting) are not specific
to a particular vertical, which can slightly mitigate the risk.
We view Genpact's client concentration risk as moderate
despite the company's top 10 clients (including General Electric
Co.: GE; AA+/Stable/A-1+) contributing more than 50% of its
revenues. This is based on diversified offerings to different
entities of GE, which together account for 30% of revenues.
Further, Genpact's revenues from non-GE clients has been
increasing, with the top 10 clients (excluding GE) together
accounting for less than 25% of revenues. We estimate that
Genpact's top clients' average credit quality is high (A
In our view, Genpact has an "intermediate" financial risk
profile. We expect the company to maintain the ratio of funds
from operations (FFO) to debt at 33%-35% and the ratio of
adjusted debt to EBITDA of about 2.3x-2.5x over the next two
years. We estimate its adjusted EBITDA margin to weaken due to
wage inflation but still remain about 20% over the next two
years. Genpact has private equity sponsors. Bain Capital Patners
is scheduled to acquire 30% of Genpact from Oak Hill Partners
and General Atlantic, which are the existing equity sponsors
that together own 40% of the company. But we expect the company
to strictly adhere to its financial policies (of a net
debt-to-EBITDA ratio of 2x) and proposed financial covenants
under the oversight of an independent board. We also expect
Genpact to restrict its special dividend to 2012 as planned.
Genpact benefits from it market position as one of the
leading players providing financial and accounting outsourcing
services. We believe the company's higher-value added offerings
across segments compared with peers is a competitive advantage.
This is reflected in Genpact's EBITDA margin of about 20%, and
revenue and EBITDA per employee, all of which are higher than
that of most pure play BPO peers. The company's 100% contract
renewal rate provides stability to revenues. Management's
estimate of Genpact's attrition rate of less than 25% is at the
lower-end of the industry. We view this as a positive in the
people-intensive BPO industry.
In our view, Genpact's liquidity is "adequate", as defined
in our criteria. We expect the company's liquidity sources to
exceed its uses by about 1.2x for 2012, and by more than 1.2x in
2013. Our liquidity assessment is based on the following factors
-- Sources of funds include cash and short-term deposits of
over $410 million as of March 31, 2012, and estimated FFO of
$270 million in 2012.
-- Sources also include a proposed senior credit facility of
$925 million including a senior term loan of $675 million and
revolver of $250 million.
-- Uses of funds include a refinancing of the outstanding
existing debt of $341 million, a one-time dividend payout of
$500 million, and $150 million for potential unidentified
acquisitions. The company will have negligible debt maturity in
the next few years under the proposed term loan.
-- We believe the company would be able to meet its outflows
even with a 15%-20% drop in its EBITDA.
We expect the proposed financial covenants to have adequate
headroom. Genpact is a listed company with access to the U.S
We believe any unexpected significant increase in the
special dividend amount or acquisitions can put pressure on the
liquidity. However, the proposed financial covenants should help
enforce financial discipline with progressively increasing
mandatory prepayments if the ratio of net debt to EBITDA is more
The recovery rating is based on the favorable insolvency
regime in the U.S. and a share pledge and guarantee by Genpact's
key operating and holding companies. Most of Genpact's billing
is in the U.S. through the borrowing entities. However, our
recovery rating also factors in jurisdictional complexities.
Most of Genpact's operations are carried out of India, while the
parent, various holding companies, and guarantors are based in
different jurisdictions. In our view, customer relationship
contracts and intellectual property rights are Genpact's most
valuable assets. In the absence of specific exclusions from
pledging these assets, and despite effective negative liens, we
view the overall creditor security as weak compared to our
discounted cash flow estimates. Our estimate of recovery is
based on a going-concern valuation. We believe that the company
would reorganize rather than liquidate following a payment
default, given its long-standing, attractive contracts and
established delivery capabilities.
In our simulated hypothetical default scenario, a payment
default could occur in mid 2019, when Genpact's term loan falls
due for payment. At the time of default, the stressed EBITDA
would have fallen about 60% from the $300 million unadjusted
EBITDA in 2011. We estimate Genpact's enterprise value at the
simulated point of default at about $0.7 billion. We expect
about $907 million in outstandings in the year of default,
including $880 million of loans and six months of estimated
The stable outlook reflects our expectation that Genpact
will sustain its operating performance; generating about 20%
EBITDA margins. We also expect the company to maintain financial
discipline, despite a one- time large dividend payout and
potential mid-sized acquisitions.
We may lower the rating if the company's FFO-to-debt ratio
falls below 30% and the ratio of adjusted debt to EBITDA
increases to more than 2.75x. This may happen because of: (1)
Genpact following a more shareholder friendly financial policy
leading to further dividend payments or share buybacks; or (2)
the company's adjusted EBITDA margin dropping sharply to below
We believe an upgrade is unlikely over the next 12-18
months. Nevertheless, we may raise the rating if Genpact
significantly improves its scale of operations, increasing the
business diversity by reducing dependence on the BFSI vertical.
The company should sustain its margins and maintain its
financial ratios and financial policy in line with our current
Related Criteria And Research
-- Key Credit Factors: Methodology And Assumptions On Risks
In The Global High Technology Industry, Oct. 15, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix
Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April
-- Credit FAQ: Knowing The Investors In A Company's Debt And
Equity, April 4, 2006 Ratings List New Rating
Corporate Credit Rating BB+/Stable/--
Genpact International Inc.
US$250 mil Revolving Credit BB+
Facility bank ln due 2017
Recovery Rating 3
US$675 mil Term Loan bank ln due BB+
Recovery Rating 3