Fitch: CA's 'BBB+' IDR Unaffected by Acquisition of Rally Software

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings believes the ratings for CA, Inc. (CA), including the 'BBB+' long-term Issuer Default Rating (IDR), are unaffected by the proposed acquisition of Rally Software Development Corp. (Rally).

Total rated debt was approximately $2.3 billion including CA's undrawn $1 billion revolving credit facility (RCF). A full list of current ratings follows at the end of this release.

CA announced it entered into a definitive agreement to acquire Rally, a platform software provider for software-as-a-service (SaaS) applications development, for $480 million, net of cash.

CA will fund the transaction with available cash, which was $2.8 billion as of March 31, 2015, and free cash flow (FCF), which Fitch expects will exceed $400 million in fiscal 2016. The acquisition is expected to close in the second quarter of CA's fiscal 2016, pending shareholder and regulatory approval.

Fitch believes Rally will strengthen CA's SaaS capabilities through the addition of a rapidly growing App Dev platform business and valuable software engineering resources. The acquisition also provides revenue synergies from leveraging CA's global salesforce and partner networks.

The Rally acquisition will add roughly $87.5 million of revenues but dilute CA's profitability. Nonetheless, Fitch expects double-digit revenue growth for this business, and the aforementioned cross-selling opportunities will drive profitability closer to CA's corporate-wide operating EBITDA margin, which Fitch estimates will be 40% for fiscal 2016.

KEY RATINGS DRIVERS

CA's ratings and Outlook reflect:

--Strong share position in mainframe and addressable security software markets, both of which benefit from high customer switching costs.

--Significant recurring revenue from software subscriptions and maintenance (84% of total revenue).

--Solid liquidity as of March 31, 2015 supported by (i) $2.8 billion of cash (69% offshore); (ii) $1 billion undrawn RCF expiring June 7, 2019; (iii) strong and consistent FCF, primarily due to highly profitable recurring mainframe software maintenance revenue. Fitch expects CA's annual FCF (post-dividends) to exceed $400 million from fiscal 2016 - fiscal 2018.

--Pro forma for the acquisition, Fitch estimates total leverage (total debt-to-operating EBITDA) will be unchanged. Fitch expects CA will maintain total leverage below 1.5x over the intermediate term.

--Conservative financial policies. CA continues to maintain solid credit protection measures for the rating, with total leverage (total debt-to-operating EBITDA) below 1x in fiscal 2015. Fitch expects total leverage to remain below 1.5x and operating EBITDA-to-gross interest expense to exceed 10x.

Ratings concerns center on:

--Vast majority of operating profit continues to be derived from the Mainframe Solutions (MS) segment, which is expected to experience flat to modestly declining revenues through 2018. MS represents approximately 56% of total revenue but 89% of total segment operating profit because of the significant profit margin differential compared with Enterprise Solutions (ES).

An unexpected significant decline in customer mainframe usage would have a material adverse effect on CA's credit ratings in the absence of a significant improvement in ES.

--Weaker than expected revenue growth in ES. In fiscal 2015, ES declined 1% in constant currency primarily due to weak sales execution and the timing of renewals. ES has a lower operating margin profile (11% in fiscal 2015) than MS (approximately 59%), but presents long-term revenue growth opportunities to offset declines in CA's legacy mainframe business.

--Meaningfully larger competitors with superior financial flexibility.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Revenue growth in constant currency flat to slightly negative over the intermediate term.

--Domestic cash used to fund the Rally acquisition for approximately $480 million, net of cash acquired.

--Total leverage to remain below 1.5x and operating EBITDA-to-gross interest expense to exceed 10x.

--Annual FCF expected to exceed $400 million.

--Continued acquisition activity will shift revenue mix away from declining legacy mainframe business.

RATINGS SENSITIVITIES

Negative rating actions could occur if: (i) revenues materially contract over a sustained period, signaling a faster than anticipated decline in the mainframe market that is not offset by ES, or (ii) operating profit margin declines, likely from a failure to adequately scale down mainframe-related costs.

Positive rating actions are unlikely in the intermediate term in the absence of meaningfully stronger contribution from ES that results in a more balanced revenue mix.

Fitch expects annual FCF of more than $400 million through 2018, driven by solid MS operating profitability and high maintenance renewal rates. Fitch anticipates CA will use FCF to fund small technology-focused acquisitions and share repurchases, which were nearly $500 million in FY 2015.

Total debt at March 31, 2015 was approximately $1.3 billion and primarily consisted of:

--$250 million of 2.875% senior notes due 2018;

--$750 million of 5.375% senior notes due 2019;

--$250 million of 4.5% senior notes due 2023.

Fitch continues to rate CA's ratings as follows:

--Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured revolving credit facility (RCF) 'BBB+';

--Senior unsecured notes 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Corporate Rating Methodology' (May 28, 2014).

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150527006692/en/

Fitch Ratings
Primary Analyst
William Dickson
Associate Director
+1-212-908-0808
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
or
Media Relations
Alyssa Castelli
+1-212-908-0540
New York
[email protected]
or
Elizabeth Fogerty
+1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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