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Form 6-K FORMULA SYSTEMS (1985) For: Aug 31

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August 31, 2015 8:50 AM EDT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

 

For the month of August 2015

 

Commission File Number: 000-29442

 

FORMULA SYSTEMS (1985) LTD.

(Translation of registrant’s name into English)

 

5 HaPlada Street, Or-Yehuda, Israel

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

 

 

 

 

CONTENTS

 

On August 30, 2015, Formula Systems (1985) Ltd. (“Formula” or the “Company”) reported publicly to the Israeli Securities Authority (the “ISA”) and the Tel Aviv Stock Exchange (the “TASE”) that Standard & Poor’s Maalot (“S&P”) had issued a credit rating of ilA+ for Formula as well as for each of its two prospective series of debentures to be offered in Israel (the terms of which are described below). S&P furthermore forecasted that such credit ratings are stable.

 

The credit ratings are based on a number of factors and considerations, which are summarized in the English translation of the report of S&P that is appended to this Report of Foreign Private Issuer as Exhibit 99.1.

 

As reported by the Company in its Report of Foreign Private Issuer on Form 6-K, furnished to the Securities and Exchange Commission on August 24, 2015, Formula is considering publication of a prospectus supplement to its Israeli shelf prospectus, pursuant to which Formula would offer to the Israeli public, in a uniform manner, either or both of two new series of debentures. One series of debentures (the “Secured Debentures”) would be secured by liens on the shares of the Company’s subsidiaries and affiliate held by the Company, while the second series (the “Convertible Debentures,” and, together with the Secured Debentures, the “New Debentures”) would be convertible into ordinary shares of the Company.

 

Publication of the final-form indentures for the New Debentures, as well as the actual offering of the New Debentures, is subject to receipt of the required approvals under Israeli law, including the approval of the Company’s board of directors, the ISA and the TASE.

 

To the extent that the New Debentures are actually offered, they will be offered only in Israel and not to U.S. persons (as defined in Rule 902(k) under the Securities Act of 1933, as amended (the “Securities Act”)), and will be offered in an overseas directed offering (as defined in Rule 903(b)(i)(ii) under the Securities Act) that is exempt from registration under the Securities Act pursuant to the exemption provided by Regulation S thereunder.

 

Annexed hereto and incorporated by reference herein is the following exhibit:

 

Exhibit No.

 

99.1

 

Exhibit Description

 

Report of Standard & Poor’s Maalot as to Credit Rating of Formula Systems (1985) Ltd. and its Series A and Series B Debentures

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FORMULA SYSTEMS (1985) LTD.  
       
Date: August 31, 2015 By: /s/ Asaf Berenstin                           
    Asaf Berenstin  
    Chief Financial Officer  

 

 

 

 

 

Exhibit 99.1

 

 

 

 

Formula Systems Ltd.

 

New Rating

 

Issuer Credit Rating Of ‘ilA+ Assigned; Outlook Stable

 

Primary Credit Analyst

 

Matan Benjamin, 972-3-7539731 [email protected]

 

Secondary Credit Analyst

 

Zvi Boimer, 972-3-7539723 [email protected]

 

Table of Contents

 

Summary
Rating Action
Rationale
Outlook
Collateral
Modifiers
Related Criteria And Research

 

Please note that this translation was made for the company's use only and under no circumstances obligates Standard & Poor's Maalot. In the case of any discrepancy with the official Hebrew version published on August 30, 2015, the Hebrew version shall apply.

 

 

 

New Rating  August 30, 2015 | 1

 

 

Formula Systems Ltd.

New Rating

 

Issuer Credit Rating Of ‘ilA+ Assigned; Outlook Stable

 

Summary

•Through its subsidiaries and affiliates, Matrix, Sapiens, Magic and Insync, Formula Systems Ltd. (“Formula”) develops, markets and distributes software and software tools and provides software services to computerized systems.

 

•Formula’s credit rating reflects, on the one hand, Matrix’s strong competitive position in the Israeli IT market and the high growth rates of Magic and Sapiens, and, on the other hand, a relatively weak competitive position in global markets due to a limited scope of operations and IP rights compared with similar global competitors.

 

•The rating also reflects the relatively low leverage as expressed in an adjusted gross debt-to-EBITDA ratio of about 2.5x and an expected LTV (loan-to-value) ratio of about 16% after the debt issuance.

 

•Formula plans to issue two new bond series at aggregate par value of NIS 250 million ($65 million) and use the proceeds to expand operations through new investments or alternatively to increase its holdings in its subsidiaries and affiliates.

 

•We are assigning an ‘ilA+’ issuer credit rating for Formula and ‘ilA+’ issue ratings for Series A and B bonds that the company intends to issue.

 

•The stable outlook reflects our assessment that Matrix will maintain its leading position in the Israeli IT market and that Magic and Sapiens’ operating performance will remain stable or improve. The outlook also reflects our assessment that the adjusted gross debt-to-EBITDA ratio will remain under 3.0x and that the LTV ratio will not materially differ from our expectations (after the issuance).

 

Rating Action

On August 30, 2015, Standard & Poor’s Maalot assigned its ‘ilA+’ rating to Formula Systems Ltd., operating in the development, marketing and distribution of software and software tools and in providing software services to computerized systems. Standard & Poor’s Maalot also assigned ‘ilA+’ issue ratings to Series A and B bonds that the company plans to issue, at a total value of NIS 250 million.

 

Rationale

Formula Systems Ltd. (“Formula”) was established in 1985 and its shares are traded on the Tel-Aviv Stock Exchange and on the NASDAQ. Through its subsidiaries and affiliates, Matrix IT Ltd. (50%), Sapiens International N.V. (49.96%), Magic Software Enterprises Ltd. (45.6%) and Insync Staffing Inc. (90%), the company operates in the development, marketing and distribution of software and software tools and in providing software services to computerized systems. Matrix, Sapiens and Magic are listed companies on the Tel-Aviv Stock Exchange (member of the Tel Aviv 100 index), while Sapiens and Magic are listed on the NASDAQ. The controlling shareholder of the company is the Polish Asseco group (46.33%), which focuses on the development and marketing of software and IT services to organizations.

 

Our assessment of Formula’s business risk profile reflects the following major factors:

 

 

www.maalot.co.il August 30, 2015 | 2

 

 

Formula Systems Ltd.

 

•Matrix’s strong market position in the Israeli IT market. Matrix is one of the leading companies in the Israeli IT market and enjoys a positive reputation and a strong brand name for a long period.

 

•Matrix’s exposure to risks posed by the Israeli IT services market, including price competition which erodes profitability over time.

 

•A large variety of products and services provided by Formula, and a diversified customer base in a variety of industries.

 

•Significant growth in Sapiens’ and Magic’s activity. In 2014, Sapiens’ and Magic’s revenues grew by 16% and 13% respectively. This growth was achieved, in part, through mergers and acquisitions with companies operating in similar businesses and through implementing reorganization and efficiency measures which supported client base expansion and an increase in follow-up sales to existing clients.

 

•Relatively high barriers to entry in Sapiens’ markets which are based on long-term relationships with clients and high cost of changing software suppliers.

 

•Limited revenue and EBITDA base compared to competitors in global markets. Global competitors enjoy economies of scale which enables them to bear the high costs of R&D and make material capital investments.

 

•Relatively low scope of IP rights and limited R&D capabilities. A large share of the company’s revenues derives from services, and the rest is accounted for by license sales. Ownership of IP rights and R&D capabilities are crucial for establishing barriers to entry and a leading market position.

 

Given Formula’s comportment (high exposure to subsidiaries and affiliates operating risk, material involvement in subsidiaries and affiliates management and business strategy and a view of its holdings as long-term core investments), we examine the company’s financial risk profile mainly on the basis of its consolidated financial statements, and view its LTV ratio as an indicative ratio. Since December 2014, Formula’s financial statements include a full consolidation of Matrix, Sapiens and Insync, while Magic is an affiliated company and treated via the equity method. Therefore, we adjust Formula’s consolidated EBITDA by the amount of dividends received from Magic.

 

In our base case scenario we assume that Formula’s adjusted EBITDA will be $90-100 million in 2015. After the debt issuance, we foresee a gross debt-to-adjusted EBITDA ratio of 2.5x-3.0x in 2015 and 2.0x-2.5x in 2016. The company’s LTV ratio is expected to be about 16% post-issuance, assuming no material change in the value of the investment portfolio, which we value at $560 million as of August 25, 2015.

 

Our base case scenario for 2015-2016 reflects the following major assumptions:

 

•10%-15% annual growth in Sapiens’ sales in 2015 and 2016, and 3%-6% annual growth in Matrix’s sales;

 

•A 12%-14% EBITDA margin in 2015 and 2016;

 

•$3.5-4.5 million annual dividend receipts from Magic;

 

•$10-12 million annual dividend distribution by Formula;

 

•$65 million debt issuance;

 

•No surplus cash adjustment netted from debt.

 

Based on these assumptions, we expect the following debt coverage ratios:

 

•Gross debt-to-adjusted EBITDA ratio of 2.5x-3.0x in 2015 and about 2.0x-2.5x in 2016;

 

•Post-issuance LTV ratio of about 16%.

 

 

www.maalot.co.il August 30, 2015 | 3

 

 

Formula Systems Ltd.

 

Liquidity

Formula’s liquidity profile is “Adequate” according to our criteria. We assess Formula’s liquidity on a standalone basis, as a holding company. We believe that the fact that Formula’s portfolio is mostly comprised of listed assets provides the company with some financial flexibility. Nevertheless, the company’s current stakes in its major subsidiaries and affiliates reduce its willingness to sell parts of its holdings, which could cause Formula to relinquish its controlling shareholder status. In addition, Formula’s lack of full control over its subsidiaries sets limitations on up-streaming of cash flow from subsidiaries. The company is therefore dependent on dividends from subsidiaries to serve its debt. Despite the above, we note that Formula, as a controlling shareholder, has significant influence over dividend distribution in affiliated companies, whose cash balances are currently high. It should also be noted that Magic and Matrix have an official policy of distributing dividends of up to 50% and 75% of net income, respectively. Sapiens regularly distributes up to 50% of its net income despite not having an official dividend policy.

 

We expect the company's liquidity sources to exceed funding needs for the next 12 months by more than 1.2x.

 

Our base case liquidity scenario assumes that the primary liquidity sources available to the company in the 12 months beginning on June 30, 2015, are:

 

•Approximately $ 20.5 million in unrestricted cash available as of June 30, 2015;

 

•Approximately $ 16 million expected dividend income from subsidiaries and affiliates.

 

We assume the company’s primary liquidity uses in the same period to be:

 

•Repayment of contractual debt of approximately $6.5 million;

 

•Interest payments of approximately $2.8 million;

 

•General and administrative expenses of approximately $2 million;

 

•Dividend distribution of approximately $ 12 million.

 

Outlook

The stable outlook reflects our view that Matrix will maintain its leading position in the Israeli IT market and that Magic and Sapiens’ operating performance will remain stable. The outlook also reflects our assessment that the gross debt-to-EBITDA ratio will remain below 3.0x and that the expected LTV ratio will not materially change after the upcoming debt issuance.

 

Downside Scenario

An increase in the debt-to-EBITDA ratio to above 3.0x or a material deviation in the LTV ratio from our expected level after the debt issuance may exert negative pressure on the rating. This could occur as a result of deterioration in subsidiaries and affiliates operating performance or market value, or due to significant growth in the group’s financial debt for the purpose of new acquisitions or large scale dividend distributions.

 

 

www.maalot.co.il August 30, 2015 | 4

 

 

 Formula Systems Ltd.

 

Upside Scenario

We may consider a positive rating action if the company’s revenues and EBITDA base grow materially and the EBITDA margin is above 20%. A positive rating action is also conditioned on the gross debt-to-EBITDA ratio being consistently below 2.0x.

 

Collateral

Bond series A which Formula plans to issue will carry a security package which includes a fixed first pledge on Matrix shares, Magic shares and Sapiens shares. According to our criteria for notching up of secured debt, Bond series A is not eligible for notching up compared to Formula’s ilA+ issuer credit rating.

 

Modifiers

Diversification portfolio effect: Neutral
Capital structure: Neutral
Liquidity: Neutral
Financial policy: Neutral
Management/Governance: Neutral
Comparable ratings analysis: Negative

 

Related Criteria And Research

•Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, December 16, 2014

 

•National And Regional Scale Credit Ratings, September 22, 2014

 

•Standard & Poor’s National And Regional Scale Mapping Tables, September 30, 2014

 

•Standard & Poor’s Ratings Definitions, November 20, 2014

 

•Methodology: Timeliness OF Payments: Grace Periods, Guarantees, And Use of ‘D’ and ‘SD’ Ratings, October 24,

 

•Use Of CreditWatch And Outlooks, September 14, 2009

 

•Corporate Methodology: Ratios And Adjustments, November 19, 2013

 

•Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, November 13, 2012

 

•Methodology: Industry Risk, November 19, 2013

 

•Country Risk Assessment Methodology And Assumptions, November 19, 2013

 

•Key Credit Factors For The Technology Hardware And Semiconductors Industry, November 19, 2013

 

 

www.maalot.co.il August 30, 2015 | 5

 

 

Formula Systems Ltd.

 

Rating Detail (As of 30-August-2015)  
   
Formula Systems Ltd.  
Issuer Credit Rating ilA+/Stable
   
Senior Secured Debt  
Series A Bonds ilA+
   
Senior Unsecured Debt  
Series B Bonds ilA+
   
Rating History  
August 30, 2015 ilA+/Stable

 

Standard & Poor's Maalot ratings are based on information received from the Company and from other sources that Standard & Poor's Maalot believes to be reliable. Standard & Poor's Maalot does not audit the information it receives nor does it verify the correctness or completeness of such information.

  

It is hereby clarified that Standard & Poor's Maalot rating does not reflect risks relating to and/or arising from breaches, through intent or oversight, of any of the obligations included in the bond documents and/or the incorrectness or inaccuracy of any of the representations contained in the documents relating to the bond offering that is the subject of this rating, Standard & Poor's Maalot report or the facts that form the basis for the opinions expressed to Standard & Poor's Maalot as a condition for the giving of the rating, fraudulent or dishonest acts of commission or omission, or any other act that contravenes the law.  

 

The ratings could be revised as a result of changes to the information received or for other reasons. The rating should not be perceived as expressing any opinion concerning the price of the securities on the primary or secondary market. The rating should not be perceived as expressing any opinion concerning the advisability of buying, selling or holding any security.

 

© Standard & Poor's Maalot reserves all rights. This summary is not to be copied, photographed, distributed or used for any commercial purpose without Standard & Poor's Maalot consent, except to provide a copy of the whole report (with an acknowledgement of its source) to potential investors in the bonds that are the subject of this rating report for the purpose of their reaching a decision concerning the acquisition of the aforesaid bonds.

 

www.maalot.co.il August 30, 2015 | 6

 

 

 

 


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