Fitch Rates FIS's Proposed Senior Unsecured Note Offering at 'BBB-'
NEW YORK -- April 10, 2013
Fitch Ratings has assigned a 'BBB-' rating to Fidelity National Information
Services, Inc.'s (FIS) proposed offering of senior unsecured notes. Proceeds
from the offering are expected to be used to redeem up to $750 million in
7.625% senior unsecured notes due 2017. Fitch does not expect this offering to
result in any material increase in leverage.
KEY RATING DRIVERS:
FIS has adopted a more conservative approach to capital allocation in recent
years as its business strategy has moved beyond its acquisition growth phase.
Historically the company actively pursued debt-financed acquisitions in
addition to a large debt-financed share repurchase in 2010. Going forward,
Fitch believes that acquisitions will be limited to small niche additions to
the business, funded by cash from operations. Fitch expects that FIS will
continue to focus on shareholder returns but that share repurchases will not
result in significant leveraging events beyond levels contemplated in the
Fitch estimates leverage (total debt / operating EBITDA) at 2.4x (or 2.7x when
adjusted for operating leases). Fitch would expect leverage to remain near
2.5x given the current rating category with the potential for modest temporary
spikes. Alternatively, free cash flow before dividends would be expected to
remain above 10% of total adjusted debt (14.8% currently). FIS's strong free
cash flow profile in recent years could be supportive of positive rating
action although the company's meaningful dividend policy at least partially
negates that credit strength.
FIS's ratings are supported by many qualitative factors which also drive
significant event risk. Specifically, FIS competes in a relatively stable
market with high barriers to entry, significant recurring revenue and
long-term contracts. The company's strong profitability (EBITDA margins of 30%
in 2012) and free cash flow generation are evidence of this position in the
marketplace. The company has in the past viewed these characteristics as a
platform for leveraging events and has also been the target of prior leveraged
Fitch believes that a leveraged recap or leveraged buyout event remains the
biggest risk for the credit. However, a more conservative approach to capital
allocation from management and recent significant increase in the dividend
rate, Fitch believes, reduces the probability of such an event. While higher
dividends are not generally considered credit friendly, Fitch believes that
for FIS, this should reduce the potential for activist shareholder pressure in
the future. FIS's annual dividend was raised from $0.20 per share to $0.80 per
share in January 2012 and $0.88 per share for 2013. This represents a 2.4%
dividend yield based on the current stock price. Fitch believes this dividend
level should support the stock in the future, which would in theory partially
mitigate shareholder interest in increasing leverage at the company.
Rating strengths include the following:
--Strong diversification, with increasing international diversification
although highly dependent on small- and mid-tier banks;
--High switching costs.
Rating concerns include:
--History of debt M&A and shareholder-friendly actions;
--High fixed-cost business;
--Potential regulatory changes;
--Increasing competition from non-traditional competitors such as IBM and
Oracle which have greater resources.
Liquidity as of Dec. 31, 2012 was solid with cash of $518 million and $1
billion available under a $1.15 billion senior unsecured revolving credit
facility, expiring March 2017. Additionally, free cash flow has averaged near
$700 million annually over the past three years.
Total debt as of Dec. 31, 2012 was $4.4 billion. In January 2013, FIS repaid
its $250 million unsecured term loan maturing 2014 with borrowings from its
revolving credit facility. Pro forma for this action, the debt balance
consisted principally of the following:
--$376 million outstanding under the aforementioned senior unsecured revolving
credit facility (reducing availability to $773 million);
--$2 billion outstanding under a senior unsecured term loan-A maturing March
--$750 million in 7.625% senior unsecured notes due July 2017;
--$500 million in 7.875% senior unsecured notes due July 2020; and
--$700 million in 5.0% senior unsecured notes due March 2022.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Continued growth in the business driven by cross-selling of products and
services across the domestic customer base, which increases FIS's value to
customers, as well as growth in the international business which provides
--Continued moderation of debt-financed acquisitions and share repurchases
coupled with management's commitment to maintain a reasonably conservative
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--More aggressive capital distribution to shareholders, particularly if these
actions are in response to changes in equity valuation;
--Significant changes to the structure of the financial services sector which
could lead to the loss or consolidation of a significant portion of FIS's
Fitch currently rates FIS as follows:
--Senior unsecured revolving credit facility 'BBB-';
--Senior unsecured term loans 'BBB-'; and
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012;
--'Evaluating Corporate Governance', dated Dec. 12, 2012;
--'Rating Technology Companies,' dated Aug. 9, 2012.
Applicable Criteria and Related Research
Rating Technology Companies
Evaluating Corporate Governance
Corporate Rating Methodology
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Jason Paraschac, CFA, +1-212-908-0746
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA, +1-212-908-0548
John M. Witt, CFA, +1-212-908-0673
Brian Bertsch, +1-212-908-0549
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