Fitch Affirms Fidelity National Information Systems' IDR at 'BBB'; Outlook Negative
The Negative Rating Outlook reflects FIS' elevated leverage following the close of the SunGard acquisition and slower than expected deleveraging progress. Fitch calculates pro forma total leverage (total debt to operating EBITDA) for the SunGard acquisition and August debt issuance to be 4.0x, as of June 30, 2016, which is outside the expectations for the current rating. Fitch expects leverage to decline below our 3.0x sensitivity over the next 12 to 18 months.
KEY RATING DRIVERS
Stable Market Demand: Fitch believes FIS' mission critical products, recurring revenue and financial institution outsourcing trends offer stable market demand and visibility into future revenues and cash flow. Customer engagements are typically secured by long-term contracts (five years on core products) and high renewal rates (>90%). Fitch estimates FIS' recurring revenue for the combined company to be 79% and only 3% of revenue is tied to trading volume.
Outsourcing Trends: Fitch believes financial institutions will continue outsourcing functions to keep pace with competitors and to focus on core competencies. Regional banks are facing the most pressure as they try to keep pace with the big banks and are falling behind community banks that have already made the decision to outsource. Fitch also believes FIS' complete bank solution is a competitive advantage as customers outsource additional functions and consolidate vendors.
Commitment to Investment Grade Ratings: Management has reconfirmed its commitment to having a solid investment grade rating and maintaining reasonably conservative credit metrics. FIS is committed to reducing leverage to 2.5x or below over the long-run following the acquisition of SunGard. As bank regulators focus on safety and soundness of banks, Fitch believes vendors with investment grade ratings could have an advantage given the mission critical nature of certain applications.
Scalable Business: Fitch believes FIS' strong EBITDA margins are supported by the operating leverage in the business and will expand over the intermediate term. Integrated Financial Solutions (IFS) EBITDA margins are approximately 39% and Fitch expects modest expansion as FIS' core bank processing software is offered through a hosted model. The hosted software is pushed to thousands of customers, generating higher EBITDA margins as incremental customers are added. However, pricing pressure is expected to partially offset margin improvement as core processing is very competitive in the U. S. EBITDA margins for Global Financial Solutions (GFS) are approximately 27% and are expected to expand as 85% of revenue is tied to intellectual property, providing economies of scale as the business grows.
Leverage: Fitch estimates pro forma total leverage (total debt to operating EBITDA) for the SunGard acquisition and August debt issuance to be 4.0x, as of June 30, 2016. Leverage is currently elevated for the rating category, Fitch expects FIS to get below our 3x leverage rating sensitivity in the next 12 to 18 months. The company has decreased leverage, pro forma for the SunGard acquisition, from 4.3x as of the year-ended Dec. 31, 2015 by reducing debt and EBTIDA growth.
End Market Concentration: FIS' customers are primarily financial institutions, exposing the company to industry cyclicality and consolidation. Fitch believes that industry consolidation is FIS' primary risk, but cyclicality could result from customer's exposure to interest rates.
Fitch's key assumptions within our rating case for the issuer include:
--Fitch expects organic revenue growth in the low - to mid-single digits;
--EBITDA margins in the low 30's and expanding over the rating horizon from synergies and operating leverage;
--Fitch expects the full run-rate of synergies of $200 million annually to be reached in 2017;
--Near-term expected cash flows incorporate certain upfront expenses to achieve synergies;
--Fitch does not expect large acquisitions in the near term but does expect bolt-on acquisitions over the rating horizon;
--Fitch does not expect FIS to engage in stock buybacks and will focus on reducing debt until it approaches its target range.
Positive Sensitivity: Continued growth in the business driven by cross-selling of products and services across the domestic customer base, which increases FIS' value to customers, as well as growth in the international business which provides further diversification. Commitments from management to maintain leverage at or below 2.2x to 2.3x.
Negative Sensitivity: A change in financial policy leading to more aggressive capital distribution to shareholders or leverage targets. Significant changes to the structure of the financial services sector which could lead to the loss or consolidation of a significant portion of FIS' customer base. Leverage above 3.0x for a sustained period would be a potential cause for a negative rating action.
Solid Liquidity: Pro forma for the August debt issuance, liquidity as of June 30, 2016 was solid with cash of approximately $1 billion ($500 million held outside the U. S.) and $3 billion available under the senior unsecured revolving credit facility, expiring August 2021. Additionally, free cash flow (FCF; after dividends) has been more than $400 million annually over the past three years and Fitch expects FCF to exceed $1 billion over the rating horizon.
Total debt as of June 30, 2016 is $11.2 billion and has not materially changed from the August financing activities. Total debt consists of:
--$3 billion senior unsecured revolving credit facility due 2021;
--$1.5 billion senior unsecured term loan due 2018;
--$300 million 1.45% senior unsecured notes due 2017;
--$250 million 2.00% senior unsecured notes due 2018;
--$750 million 2.85% senior unsecured notes due 2018;
--$1.75 billion 3.625% senior unsecured notes due 2020;
--$750 million 2.25% senior unsecured notes due 2021;
--$700 million 5.00% senior unsecured notes due 2022;
--$500 million 4.50% senior unsecured notes due 2022;
--$1 billion 3.50% senior unsecured notes due 2023;
--$700 million 3.875% senior unsecured notes due 2024;
--$1.5 billion 5.00% senior unsecured notes due 2025;
--$1.25 billion 3.00% senior unsecured notes due 2026;
--$500 million 4.50% senior unsecured notes due 2046.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the ratings for Fidelity National Information Services, Inc. as follows:
--Long-Term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB'.
The Rating Outlook is Negative.