S&P Rases iGate Corp. (IGTE) to BB'; Says Financial Risk Profile has Improved

Standard & Poor's Ratings Services today said it raised its corporate credit rating on Bridgewater, N.J.-based iGATE Corp. (Nasdaq: IGTE) to 'BB' from 'BB-'. The outlook is stable.

At the same time, we raised the issue-level rating on the company's $325 million senior unsecured notes to 'BB' from 'BB-'. The recovery rating remains '3', indicating our expectation for average (50%-70%, at the higher end of the range) recovery in the event of a payment default.

"The upgrade of IGATE reflects our view of the company's improved financial risk profile after it significantly reduced leverage in 2014 to 2.1x from 5.9x in 2013," said Standard & Poor's credit analyst Peter Bourdon.

Voluntary debt repayments totaling about $126 million in 2014, and the redemption of its $441 million series B preferred stock (as of Nov. 4, 2014) for equity and $80 million of cash, propelled the debt reduction. In addition, our 2014 leverage calculation includes a surplus cash adjustment of $140 million, which was not included in our 2013 calculation due to our view of the company's business risk profile at that time.

IGATE's business risk profile is "fair," which we revised from "weak" in March 2014 following the successful integration of Patni Computer Systems. A significant base of recurring revenues, strong customer relationships, and solid organic revenue growth support our business risk profile assessment. Revenues increased to $1.3 billion in 2014, or 10.2%, after increasing about 7% in 2013. However, high customer concentration, modest market share, and a relatively small operating scale compared to those of its larger business process outsourcing (BPO) peers offset these strengths. IGATE's top 10 customers amounted to 51% of revenue in 2014.

The stable outlook reflects our expectation that the company will generate mid- to high-single-digit percent revenue growth in 2015 and that leverage will decline to roughly 1.5x over the next 12 months as a result of organic EBITDA growth and an increase in cash and short-term investments (which we use as an adjustment to debt).

We could lower the rating if the company loses key customers resulting in a significant revenue and EBITDA decline, or if there is a change to the existing financial policy such that the company undertakes shareholder reward initiatives or a large, debt-financed acquisition such that leverage sustains above 3x.

Although unlikely over the next 12 months, we could raise the rating if the company significantly increases its scale, further diversifies its revenue base, and commits to a conservative financial policy with leverage sustaining at or below 1.5x.

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