Fitch Affirms CA's Ratings at 'BBB+'; Outlook Stable
The ratings reflect CA's broad suite of application development and delivery and infrastructure software, strong free cash flow (FCF) generation and low leverage. Fitch expects Mainframe Solutions to remain a significant cash contributor for CA, but also exert downward pressure on profitability as the higher margin segment decreases as a portion of the total revenue mix. Fitch expects stable overall financial performance, supported by infrastructure software's greater resilience to cloud disruption relative to application software.
KEY RATING DRIVERS
Comprehensive Product Portfolio: Fitch believes CA's product portfolio addresses most major types of application development and delivery and infrastructure software. Broad product coverage provides CA with access to a large addressable market, the ability to offer a suite of solutions versus a complex and costly combination of point solutions from multiple providers, and diversification against weakness in demand for a particular product.
Mainframe Concentration: Mainframe Solutions comprise 55% of CA's total revenue and 89% of total segment operating profit. Fitch expects this segment to decline low single digits based on the lack of new use cases for mainframes and price declines that outweigh usage growth (generally measured in millions of instructions per second (MIPS)). Despite expected lackluster revenue performance, Fitch believes that mainframe technology will remain viable over the long-term due to its security, availability and through-put advantages for mission critical applications, thus providing CA with an ongoing highly cash generative business.
Competitive Landscape: Fitch believes CA is among the leaders in the infrastructure software market, with varying levels of strength across the various market segments. The company competes with larger players such as IBM, HP and Microsoft, as well as others such as BMC Software and Compuware. As with any other software company, market leadership does not insulate CA from the competitive nature of the software industry. Fitch believes CA's security products will face an increasingly intense competitive environment as cyber security is receiving massive amounts of attention from companies and investors of all sizes.
Resilient to Cloud Disruption: Cloud disruption across the software industry has been well documented. While virtually every software provider must invest in cloud capabilities, Fitch believes the lower rate of cloud adoption in infrastructure software somewhat insulates CA and its peers (particularly those outside of mainframe environments) from the revenue and margin pressures pervasive across application software vendors.
Strong Margins, FCF: Fitch expects CA to generate funds from operations (FFO) margins of about 25% and post-dividend FCF margins in the low to mid teens (over $500 million annually). A slowly decreasing mix of higher margin Mainframe Solutions revenue should exert some downward pressure on margins, although Fitch expects CA to manage costs such that EBITDA margins remain around 40% over the rating horizon.
Capital Allocation: Fitch's forecast allows for acquisition spend averaging $300 million - $500 million per year with annual variations outside of that range. Fitch expects CA to continue repurchasing shares with excess FCF after M&A spend. Also, Fitch expects the company to continue paying a dividend with modest growth on a per share basis.
Leverage: Fitch calculates total leverage (total unadjusted debt to operating EBITDA) as of June 30, 2016 of 1.2x and FFO Adjusted Leverage of 2.6x. CA has historically maintained a conservative leverage profile and Fitch forecasts future levels to be roughly in line with the current ones.
Fitch's key assumptions within the rating case for CA include:
--Flat to slightly negative organic revenue growth as low single digit declines in Mainframe Solutions and low to mid single digit declines in Professional Services offset growth in Enterprise Solutions; roughly flat total revenue growth driven by low to mid single digit growth in Enterprise Solutions and acquired revenue from M&A
--EBITDA margins around 40% as scaling of nascent Enterprise Solutions products and cost controls offset increasing mix of lower margin Enterprise Services revenue
--Domestic acquisition spend averaging $300 million per year, with annual variations around that figure likely
--Annual mid-cycle FCF to exceed $500 million (post-dividend)
--Annual share repurchases sufficient to offset dilution
--Debt maturing within rating horizon is refinanced at like amounts
Negative rating actions would likely coincide with the adoption of a more aggressive capital allocation policy that increases total debt-to-EBITDA beyond 2x or FFO Adjusted Leverage above 4x on a sustained basis, or event-driven merger and acquisition activity that drives leverage above these levels in the absence of a credible de-leveraging plan.
Additionally, negative rating actions can stem from Fitch's expectation that CA's Enterprise Solutions segment will not generate organic revenue growth during the ratings horizon indicating that the company's operating strategies have not captured sufficient traction to offset ongoing revenue declines within its legacy products and services.
Positive rating actions are unlikely in the intermediate term in the absence of meaningfully stronger contribution from Enterprise Solutions that results in a more balanced revenue mix.
Fitch believes CA has strong liquidity based on cash and cash equivalent balances as of June 30, 2016 of $2.8 billion (76% of which is held in subsidiaries outside of the U. S.), Fitch's expectations for over $500 million of annual mid-cycle FCF and undrawn $1 billion revolver. CA has a staggered maturity profile with its senior notes maturing in 2018, 2019, 2020 and 2023, and its term loan maturing in 2022.
Total funded debt as of June 30, 2016 is $2.0 billion and consists of:
--$1.0 billion senior unsecured revolving credit facility due 2019(undrawn);
--$300 million senior unsecured term loan due 2022;
--$250 million 2.875% senior unsecured notes due 2018;
--$750 million 5.375% senior unsecured notes due 2019;
--$400 million 3.600% senior unsecured notes due 2020;
--$250 million 4.500% senior unsecured notes due 2023;
--$11 million of capital leases and other obligations.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the ratings for CA, Inc. as follows:
--Long-Term Issuer Default Rating (IDR) at 'BBB+';
--Senior Unsecured Debt 'BBB+'.
The Rating Outlook is Stable.