June 15, 2017 / 8:45 AM / in a month

Fitch Rates Marble II's USD500m Note Final 'BB'

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(The following statement was released by the rating agency) SEOUL/SINGAPORE, June 15 (Fitch) Fitch Ratings has assigned Marble II Pte. Ltd.'s (Marble II) USD500 million 5.3% senior notes due 2022 a final rating of 'BB'. The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 5 June 2016. The notes are secured by Marble I Pte. Ltd.'s 100% equity stake in Marble II and the interest reserve account. The notes are rated in line with Marble II's Long-Term Foreign-Currency Issuer Default Rating as they will represent its direct, unconditional, secured and unsubordinated obligations. Proceeds will be used to refinance Marble II's existing debt, prefund six months of interest on the proposed notes, cover transaction fees and other expenses incurred in the note issuance and pay dividends to Marble II's ultimate shareholders, The Blackstone Group LP (A+/Stable) and GIC Private Limited. The notes will be structurally subordinated to any future debt at India-based IT service provider, Mphasis Limited, in which Marble II owns a 60.4% stake, and Marble II's other operating subsidiaries. However, the subsidiaries have a working capital loan of USD40 million and have limited room for additional indebtedness within the terms of the proposed notes. KEY RATING DRIVERS Moderate Market Position: Marble II's ratings reflect its mid-tier position in the global IT services industry and modest cost and technology advantage over peers. Its ratings are supported by solid long-term relationships with key customers, given the moderate-to-high costs to its customers to switch to competitors, strong domain expertise in the banking, financial services and insurance sectors, stable revenue buoyed by minimum revenue guarantees from Hewlett Packard Enterprise (HPE, BBB+/Stable) related clients, including DXC Technology Company (BBB+/Stable), HP Inc. (BBB+/Stable) and Micro Focus International plc. High Customer Concentration: Marble II has high customer concentration; its top10 clients contribute 55% of its revenue, if we exclude HPE-related clients. However, this risk is more than offset by, at least in the medium term, the revenue guarantees from its HPE-related customers of USD990 million in the next five years. The company also has a strong record of retaining solid relationship with key customers, with an average tenor of 14 years. Expanding Direct-Channel Revenue: We expect revenue from key strategic customers excluding HPE-related clients, to increase strongly over the next three years, significantly influenced by Marble II's strong relationships with strategic clients and opportunities from Blackstone portfolio companies. We believe the overlap in the Blackstone portfolio's industries and geography will help Mphasis increase its revenue faster than the industry average of 9%-11% annually. We expect Marble II to continue to generate a majority of its revenue from non-HPE clients (financial year to end-March 2017: 76%). Strong FCF at Mphasis: We expect Mphasis to continue generating positive FCF with a 5%-7% margin due to its low capex with capital intensity likely to be 1%-2%, modest working capital requirement, rising revenue and stable margins. Mphasis is likely to maintain a healthy balance sheet with minimal debt, similar to most India-based IT services companies. Mphasis only had USD40 million (INR2.6 billion) in working capital loans against cash and cash equivalents of USD464 million, including mutual fund investments, as of end-March 2017. However, this amount decreased after its April 2017 share buyback programme. Proportionate Consolidation, Higher Leverage: Marble II's debt service ability depends on dividends up-streamed from Mphasis. We analyse the Marble group by proportionally consolidating Mphasis due to the substantial level of minorities. On this basis, we expect Mable II's FFO-adjusted net leverage to increase to 5.0x at end-March 2018, from 1.1x at end-March 2017 after the proposed note issuance. However, higher operating cash flow and FCF should enable this leverage to fall below 3.0x by end-2020. Marble II will have limited ability to take on additional debt above the proposed notes due to the incurrence covenant on its notes of debt/EBITDA of 3.5x on a 100% consolidated basis (post- issuance debt/EBITDA: 3.6x), excluding a USD60 million carve-out. Lower H1B Visa Dependence: Any restrictions on US H1B temporary working visa approvals would negatively affect Indian IT companies, including Marble II. We do not expect a complete H1B ban or major restrictions on outsourcing from the US, but stricter rules or delays in granting visas would increase labour costs for onsite staff. However, Marble II has a lower exposure to such visa issues compared with peers. Its visa filing of labour condition applications as a percentage of total employees, at 3.5%, is among the lowest of peers (industry average: 10%). DERIVATION SUMMARY Marble II's credit rating of 'BB' is supported by its market position as a mid-tier Indian IT services provider, which we believe to be stronger than that of HT Global IT Solutions Holdings Limited (BB/Stable) in terms of operating scale, domain expertise especially in the banking, financial services and insurance sectors and higher utilisation rate. In addition, the company's master service agreement with HPE, with a minimum revenue guarantee of USD990 million for the next five years with a total tenor of 11 years, provides some visibility of revenue generation. The stronger business profile is somewhat constrained by Marble II's weaker financial profile, as its proportionally consolidated financials have higher leverage than that of HT Global. Marble II's FFO-net leverage will increase to 5.0x following the note issue, compared with HT Global's 4.6x on a like-for-like basis. Mable II's credit profile is constrained by its smaller scale and lack of technology and cost leadership compared with leading Indian IT companies. We believe it has limited capacity to win the largest IT orders due to its smaller scale and inability to deliver a full IT services portfolio. Nevertheless, it has demonstrated the ability to build strong customer relationships within its niche. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Revenue growth of 8%-10% over the next two years -Operating EBITDAR margin to remain flat at around 15%-16% -Capex/ revenue to remain low at around 2% from 2018 -Marble II to maintain a minimum interest coverage ratio of at least 1.0x, excluding interest reserve accounts RATING SENSITIVITIES Developments that may, individually or collectively, lead to negative rating action include: - Higher-than-expected shareholder returns, greater competition or loss of key customers leading to deterioration in proportionally consolidated FFO-adjusted net leverage to above 5.0x. - Operating EBITDAR margin declining below 15% for a sustained period Developments that may, individually or collectively, lead to a positive rating action include: - An improvement in proportionally consolidated FFO-adjusted net leverage to below 3.0x on a sustained basis - An improved market position, demonstrated by higher profitability and lower customer concentration. We are unlikely to consider an upgrade until we can confidently forecast FCF of over USD125 million (financial year ended March 2017: USD50 million), given the company's small size. LIQUIDITY Adequate Liquidity: Mphasis' liquidity was adequate as of end-March 2017, with cash and cash equivalents of USD96 million comfortably covering total debt of USD40 million, which was all short-term obligations. In addition, the company has substantial investments in open-ended liquid mutual funds of around USD349 million (INR22.7 billion), most of which we treated as readily available cash. Marble II had cash and cash equivalents of USD11.5 million at end-March 2017, of which USD9.2 million was restricted, against a USD15.7 million acquisition loan, which is payable within a year. The company is looking to refinance the loan with the proposed notes. Contact: Primary Analyst Shelley Jang Director +82 2 3278 8370 Fitch Australia Pty Ltd, Korea Branch 9F Kyobo Securities Building 97, Uisadangdaero, YeoungdeungpoGu Seoul, Korea Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Date of Relevant Rating Committee: 31 May 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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