S&P Raises iGATE (IGTE) to 'BB-'; Cites Improved Competitive Position
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Standard & Poor's Ratings Services raised its corporate credit rating on Bridgewater, N.J.–based iGATE Corp. (Nasdaq: IGTE) to 'BB-' from 'B+'. The outlook is stable.
At the same time, we assigned the company's proposed $325 million senior unsecured notes a 'BB-' issue-level rating, with a recovery rating of '3', indicating our expectation for average (50% to 70%) recovery of principal in the event of a default.
After the refinancing of the company's $770 million note closes, we will withdraw the rating on that note.
The upgrade of iGATE is based on the company's improved competitive position to "fair" from "weak", as a result of better overall operating profitability and improved operating efficiency following the successful integration of Patni Computer Systems, a provider of information technology. In addition, iGATE's financial risk improved to "significant" from "highly leveraged" based on our expectation that forecasted leverage will decline to the low-3x area at the end of 2014, reflecting debt paydowns and the netting of cash against debt per our criteria. We believe that iGATE will generate positive free cash flows and consistent EBITDA margins, while maintaining leverage in the "significant" category. We adjust the 'bb' anchor score downward by one notch because of our negative comparative rating analysis that reflects the company's unfavorable financial metrics, ratios, and market position relative to other peers.
The rating reflects iGATE's "fair" business risk profile and "significant" financial risk profile (as defined by our criteria). We view the industry risk as "intermediate" and the country risk as "very low." Our view of iGATE's fair business risk profile reflects the company's significant base of recurring revenue (98% of revenue), and consistent operating profitability. These factors are partially offset by the company's high customer and geographic concentration, relatively small operating scale to its larger direct peers, and modest market share in the highly competitive global information technology (IT) service industry. However we adjust the anchor score downward by one notch to the final 'BB-', given that the company's financial metrics and ratios are at the lower end of the range for the rating, FFO to debt falls within the "aggressive" category, and the company's market position is not favorable relative to competitors.
iGATE provides services to large and midsize organizations. iGATE's main differentiator relative to other IT service outsourcing providers is its business outcome-based pricing model--iTOPS--that combines IT with its expertise in BPO and technology services. iGATE's May 2011 acquisition of Patni provided it with the scale to successfully compete against larger peers, improved its market position, and diversified its revenue base into high growth markets such as retail and health care. However, iGATE still has high geographic concentration (roughly 80% of revenue comes from the U.S. and Canada) and customer concentration as the company's top client accounted for 13% of fiscal year end 2013 revenues. In addition, the company's top 5 and top 10 clients accounted for 40% and 50.2% of revenues, respectively.
At the same time, we assigned the company's proposed $325 million senior unsecured notes a 'BB-' issue-level rating, with a recovery rating of '3', indicating our expectation for average (50% to 70%) recovery of principal in the event of a default.
After the refinancing of the company's $770 million note closes, we will withdraw the rating on that note.
The upgrade of iGATE is based on the company's improved competitive position to "fair" from "weak", as a result of better overall operating profitability and improved operating efficiency following the successful integration of Patni Computer Systems, a provider of information technology. In addition, iGATE's financial risk improved to "significant" from "highly leveraged" based on our expectation that forecasted leverage will decline to the low-3x area at the end of 2014, reflecting debt paydowns and the netting of cash against debt per our criteria. We believe that iGATE will generate positive free cash flows and consistent EBITDA margins, while maintaining leverage in the "significant" category. We adjust the 'bb' anchor score downward by one notch because of our negative comparative rating analysis that reflects the company's unfavorable financial metrics, ratios, and market position relative to other peers.
The rating reflects iGATE's "fair" business risk profile and "significant" financial risk profile (as defined by our criteria). We view the industry risk as "intermediate" and the country risk as "very low." Our view of iGATE's fair business risk profile reflects the company's significant base of recurring revenue (98% of revenue), and consistent operating profitability. These factors are partially offset by the company's high customer and geographic concentration, relatively small operating scale to its larger direct peers, and modest market share in the highly competitive global information technology (IT) service industry. However we adjust the anchor score downward by one notch to the final 'BB-', given that the company's financial metrics and ratios are at the lower end of the range for the rating, FFO to debt falls within the "aggressive" category, and the company's market position is not favorable relative to competitors.
iGATE provides services to large and midsize organizations. iGATE's main differentiator relative to other IT service outsourcing providers is its business outcome-based pricing model--iTOPS--that combines IT with its expertise in BPO and technology services. iGATE's May 2011 acquisition of Patni provided it with the scale to successfully compete against larger peers, improved its market position, and diversified its revenue base into high growth markets such as retail and health care. However, iGATE still has high geographic concentration (roughly 80% of revenue comes from the U.S. and Canada) and customer concentration as the company's top client accounted for 13% of fiscal year end 2013 revenues. In addition, the company's top 5 and top 10 clients accounted for 40% and 50.2% of revenues, respectively.
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