Fitch Upgrades Fidelity National Information Services' IDR to 'BBB'; Outlook
NEW YORK -- February 24, 2014
Fitch Ratings has upgraded the ratings for Fidelity National Information
Services, Inc. (FIS) including its Issuer Default Rating to 'BBB'. The Rating
Outlook is Stable.
The ratings upgrade reflects the following considerations:
FIS has furthered its commitment to maintaining a conservative balance sheet
and disciplined approach to capital allocation. The company is several years
into its current strategy of optimizing the business following an aggressive
and often debt-financed acquisition growth strategy. FIS' combination of
organic growth and cash-funded acquisitions lends to expectations for
significantly reduced volatility in its balance sheet and credit metrics going
Underlying the ratings upgrade is the company's strong free cash flow and
relatively modest debt level. In the past this has led to higher event risk
for the credit. Fitch believes FIS now has a growing business need for a
strong investment grade rating as it supports the company's strategy to
attract larger bank clients. Fitch also believes the company's dividend
policy, which was raised 9% at the end of 2013, helps support the stock
valuation and has led to a reduction in event risk.
KEY RATING DRIVERS:
Fitch expects the company to maintain leverage over the long-run at or below
2.5x and to fund share repurchases principally through organic cash
generation. Fitch estimates leverage (total debt / operating EBITDA) at 2.6x
(or 2.8x 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 near 15% of total adjusted debt (14% currently).
FIS' 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
28.5% in 2013) and free cash flow generation are evidence of this position in
Fitch believes that a leveraged recap or leveraged buyout event remains the
biggest risk for the credit. However, Fitch believes a more conservative
approach to capital allocation from management and recent significant increase
in the dividend rate reduces the probability of such an event. While higher
dividends are not generally considered credit friendly, Fitch expects that
this should reduce the potential for activist shareholder pressure on FIS in
the future. The company recently raised its quarterly dividend 9% to $0.24 per
share ($0.96 per year or approximately $280 million in total). This represents
a 1.8% dividend yield based on the current stock price.
Rating strengths include the following:
--Stable end demand;
--Strong diversification, with increasing international diversification
although highly dependent on small- and mid-tier banks;
--High customer switching costs.
Rating concerns include:
--History of debt financed M&A and shareholder friendly actions;
--High fixed cost business;
--Potential regulatory changes;
--Increasing competition from non-traditional competitors such as IBM which
has greater resources.
Liquidity as of Dec. 31, 2013 was solid with cash of $548 million and $2
billion available under a $2 billion senior unsecured revolving credit
facility, expiring March 2017. Additionally, free cash flow has averaged near
$600 million annually over the past three years.
Total debt as of Dec. 31, 2013 was $4.5 billion consisting principally of:
--$29 million outstanding under the aforementioned senior unsecured revolving
--$2 billion outstanding under a senior unsecured term loan-A maturing March
--$250 million in 2% senior unsecured notes due April 2018;
--$500 million in 7.875% senior unsecured notes due July 2020;
--$700 million in 5% senior unsecured notes due March 2022; and
--$1 billion in 3.5% senior unsecured notes due April 2023.
Fitch has upgraded the ratings for FIS as follows:
--IDR to 'BBB' from 'BBB-';
--Senior unsecured revolving credit facility to 'BBB' from 'BBB-';
--Senior unsecured term loans to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-'.
The Rating Outlook is Stable.
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' value to
customers, as well as growth in the international business which provides
--Commitments from management to maintain leverage at or below 2x with
adjusted free cash flow near 20% of total adjusted debt.
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'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 5, 2013;
--'Rating Technology Companies', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Technology Companies
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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
Megan Neuburger, +1-212-908-0501
Brian Bertsch, New York, +1-212-908-0549
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