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Fitch Rates CA's $850MM Senior Unsecured Notes 'BBB+'
March 15, 2017 / 8:40 PM / 9 months ago

Fitch Rates CA's $850MM Senior Unsecured Notes 'BBB+'

(The following statement was released by the rating agency) CHICAGO, March 15 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to CA, Inc.'s (CA) issuance of $850 million multi-tranche senior unsecured notes with five- to 10-year maturities. CA intends to use the proceeds for general corporate purposes, which may include the funding of some or all of the Veracode acquisition and the repayment of existing notes due 2018. CA's Long-Term Issuer Rating (IDR) is 'BBB+' with a Stable Outlook. A complete list of current ratings follows at the end of this release. The acquisition of Veracode will strengthen CA's DevOps position by adding leading applications security testing (AST) capabilities that integrate security into software development. The deal accelerates growth in security testing, which is outpacing broader security market growth and will continue to benefit from increasing penetration of web- and cloud-based business applications over the next few years. The acquisition also provides meaningful opportunities for CA to sell into Veracode's core mid-size enterprise customer base, while adding AST offerings to CA's installed base of large enterprise customers. CA expects Veracode will add 2%-3% to revenue for fiscal 2018, which Fitch estimates equates to roughly $100 million of annual revenue, including the deferred revenue haircut. This equates to a more than 6x annual revenue acquisition multiple including the haircut but likely closer to 5x without it. As is typical with the SaaS model, acquired operating profit margins will be modestly dilutive to CA's corporate-wide margins but should expand from increasing scale. On March 6, 2017, CA announced it reached a definitive agreement to acquire privately held Veracode for $614 million of total cash consideration. CA expects the deal to close in the first fiscal quarter of 2018 (ended June 2017) and is subject to customary closing conditions, including regulatory approvals. On Jan. 18, 2017, CA also completed its acquisition of Automic Holding GmbH (Automic) for aggregate cash consideration of approximately EUR600 million. As of Dec. 31, 2016, CA had $2.8 billion in cash and cash equivalents; however, only 21% of this cash and cash equivalents was located in the U.S. Post the acquisition of Automic on Jan. 18, 2017, Fitch estimates CA had $2.2 billion in cash and cash equivalents, of which, 27% was located in the U.S. The new notes issuance will bolster CA's domestic cash balances to support the funding of the Veracode acquisition. Fitch estimates total leverage (total debt to operating EBITDA) to be 1.6x for the latest 12 months (LTM) ended Dec. 31, 2016, pro forma for new $850 million notes issuance, and Automic and Veracode acquisitions, below Fitch's negative leverage-focused rating sensitivity of 2x and should provide sufficient headroom for the company to execute on its technology-focused acquisition strategy. KEY RATING DRIVERS Comprehensive Product Portfolio: Fitch believes CA's product portfolio addresses most major types of application development and delivery and infrastructure software. Broad product coverage provides CA with access to a large addressable market, the ability to offer a suite of solutions versus a complex and costly combination of point solutions from multiple providers, and diversification against weakness in demand for a particular product. Mainframe Concentration: Mainframe Solutions comprise 54% of CA's total revenue and 85% of total segment operating profit at the end of December 2016. Fitch expects this segment to decline low single digits based on the lack of new use cases for mainframes and price declines that outweigh usage growth (generally measured in millions of instructions per second (MIPS)). Despite expected lackluster revenue performance, Fitch believes that mainframe technology will remain viable over the long-term due to its security, availability and through-put advantages for mission critical applications, thus providing CA with an ongoing highly cash generative business. Competitive Landscape: Fitch believes CA is among the leaders in the infrastructure software market, with varying levels of strength across the various market segments. The company competes with larger players such as IBM, Micro Focus (formerly HP Enterprise) and Microsoft, as well as others such as BMC Software and Compuware. As with any other software company, market leadership does not insulate CA from the competitive nature of the software industry. Fitch believes CA's security products will face an increasingly intense competitive environment as cyber security is receiving massive amounts of attention from companies and investors of all sizes. Resilient to Cloud Disruption: Cloud disruption across the software industry has been well documented. While virtually every software provider must invest in cloud capabilities, Fitch believes the lower rate of cloud adoption in infrastructure software somewhat insulates CA and its peers (particularly those outside of mainframe environments) from the revenue and margin pressures pervasive across application software vendors. Strong Margins, FCF: Fitch expects CA to generate funds from operations (FFO) margins of about 25% and post-dividend FCF margins in the low to mid-teens (over $500 million annually). A slowly decreasing mix of higher margin Mainframe Solutions revenue should exert some downward pressure on margins, although Fitch expects CA to manage costs such that EBITDA margins remain around 40% over the rating horizon. Capital Allocation: Fitch's forecast allows for acquisition spend averaging $300 million to $500 million per year with annual variations outside of that range. Fitch expects CA to continue repurchasing shares with excess FCF after M&A spend. Also, Fitch expects the company to continue paying a dividend with modest growth on a per share basis. Leverage: Fitch calculates total leverage (total unadjusted debt to operating EBITDA) as of Dec. 31, 2016 of 1.6x, pro forma for Automic and Veracode acquisitions. CA has historically maintained a conservative leverage profile and Fitch forecasts future levels to be roughly in line with the current ones. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for CA include: --Excluding contributions from Automic and Veracode, Fitch assumes flat to slightly negative organic revenue growth as low single digit declines in Mainframe Solutions and low to mid single digit declines in Professional Services offset growth in Enterprise Solutions; Fitch assumes total revenue growth will be relatively flat driven by low- to mid-single digit growth in Enterprise Solutions and acquired revenue from M&A. Fitch expects acquisitions of Automic and Veracode to add 4%-5% to revenue in FY2018. --EBITDA margins around 40% as scaling of nascent Enterprise Solutions products and cost controls offset increasing mix of lower margin Enterprise Services revenue --Domestic acquisition spend averaging $300 million per year, with annual variations around that figure likely; --Annual mid-cycle FCF to exceed $500 million (post-dividend); --Annual share repurchases sufficient to offset dilution; --Debt maturing within rating horizon is refinanced at like amounts. RATING SENSITIVITIES Negative rating actions would likely coincide with the adoption of a more aggressive capital allocation policy that increases total debt-to-EBITDA beyond 2x or FFO Adjusted Leverage above 4x on a sustained basis, or event-driven merger and acquisition activity that drives leverage above these levels in the absence of a credible de-leveraging plan. Additionally, negative rating actions could stem from Fitch's expectation that CA's Enterprise Solutions segment will not generate organic revenue growth during the ratings horizon indicating that the company's operating strategies have not captured sufficient traction to offset ongoing revenue declines within its legacy products and services. Positive rating actions are unlikely in the intermediate term in the absence of meaningfully stronger contribution from Enterprise Solutions that results in a more balanced revenue mix. LIQUIDITY Fitch believes CA has strong liquidity based on cash and cash equivalent balances of $2.3 billion post Veracode acquisition (73% of which is held in subsidiaries outside of the U.S.), Fitch's expectations for over $500 million of annual mid-cycle FCF and undrawn $1 billion revolver. CA has a staggered maturity profile with its senior notes maturing in 2018, 2019, 2020 and 2023, and its term loan maturing in 2022. The new notes issuance will have five- to 10-year maturities. Pro forma for the issuance, total funded debt is $2.8 billion and consists of: --$1 billion senior unsecured revolving credit facility due 2019(undrawn); --$300 million senior unsecured term loan due 2022; --$250 million 2.875% senior unsecured notes due 2018; --$750 million 5.375% senior unsecured notes due 2019; --$400 million 3.600% senior unsecured notes due 2020; --$250 million 4.500% senior unsecured notes due 2023; --New $500 million senior unsecured notes with 5-year maturity; --New $350 million senior unsecured notes with 10-year maturity; --$10 million of capital leases and other obligations. Fitch currently rates CA Inc. as follow: --Long-Term IDR 'BBB+'; --Revolving Credit Facility 'BBB+'; --Senior unsecured term loan 'BBB+'; --Senior unsecured notes 'BBB+'. Fitch has assigned the following ratings: --New $500 million senior unsecured notes 'BBB+'; --New $350 million senior unsecured notes 'BBB+'. The Rating Outlook is Stable. Contact: Primary Analyst Alen Lin (assumed Primary Analyst role on March 15, 2017) Senior Director +1-312-368-5471 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Jason Pompeii Senior Director +1-312-368-3210 Committee Chairperson Alen Lin Senior Director +1-312-368-5471 Date of Relevant Rating Committee: Aug. 22, 2016 Summary of Financial Statement Adjustments: Fitch made no material financial statement adjustments that depart from those contained in the published financial statements of CA, Inc. 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