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 forward.
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 the marketplace.
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
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
Total debt as of
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 further diversification.
--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' customer base.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology', dated
--'Rating Technology Companies', dated
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Technology Companies
Source: Fitch Ratings
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