Fitch Rates CA, Inc.'s Unsecured Term Loan 'BBB+'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to CA, Inc.'s (CA) $300 million unsecured term loan. Fitch's ratings affect the new term loan as well as $1.7 billion of existing debt and the $1 billion undrawn revolving credit facility (RCF). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Fitch expects proceeds from the term loan will be used for general corporate purposes, including without limitation share repurchases, acquisitions and refinancing of existing indebtedness. The term loan will mature April 20, 2022 and will rank pari passu with CA's existing senior unsecured indebtedness. Quarterly principle payments of 1.25% will be due starting April 1, 2017 increasing to 2.5% April 1, 2021 through maturity. The term loan agreement includes a consolidated debt to consolidated cash flow covenant of not greater than 4x and a consolidated cash flow to interest covenant of not less than 3.5x.

Total debt outstanding, pro forma for the new term loan and the issuance of the company's 3.6% senior unsecured notes due August 2020, is approximately $1.96 billion. Pro forma leverage increases to 1.25x as of the LTM period ended Sept. 30, 2015. Fitch believes that CA will maintain total leverage below 2x over the intermediate term.

Overall, the ratings and Outlook reflect CA's strong competitive position and leading market share within the mainframe market. The company's operating profile benefits from the relative stability, recurring revenue, high operating margin and free cash flow (FCF - defined as cash flow from operations less capital expenditures and dividends) characteristics attributable to its Mainframe Solutions (MS) business. Fitch believes the MS business will continue generating the majority of CA's FCF over the ratings horizon.

Fitch expects that MS segment revenue growth will remain flat to slightly negative (constant currency) during the intermediate term. An accelerated deterioration in the mainframe market is unlikely because most large enterprises are reluctant to switch their mission-critical operations from the mainframe environment to distributed or cloud-based alternatives due to high switching costs and the desired reliability of the mainframe environment for mission-critical operations.

CA's Enterprise Solutions (ES) segment continues to shift its revenue mix and strategic focus to higher growth products and services including management cloud, DevOps and security while rationalizing its legacy ES businesses. Fitch believes these growth markets will drive positive ES segment revenue growth by fiscal year 2017.

These growth areas are more competitive and less profitable than CA's mainframe business which increases the risk that current FCF levels may not be maintained over the long term without sustained and profitable ES growth. However, Fitch is concerned that competition, pricing pressure and economic sensitivity may hamper expected revenue growth and fail to offset the gradual but long-term decline in the mainframe market leading to a weaker operating and credit profile.

KEY RATING 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 (exceeds 80% of total revenue).

--Pro forma for the term loan, Fitch estimates total leverage (total debt-to-operating EBITDA) will be 1.25, and that CA will maintain total leverage below 2x over the intermediate term.

Ratings concerns center on:

--Vast majority of operating profit continues to be derived from the MS segment, which is expected to experience flat to modestly declining revenues through 2018. MS represents approximately 56% of total revenue but approximately 90% of total segment operating profit because of the significant profit margin differential compared with 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. ES declined approximately 4% over the LTM ending September 30, 2015 primarily due to FX headwinds. ES has a lower operating margin profile (approximately 9%) than MS (approximately 60%), 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

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

--Annual FCF expected to exceed $400 million (post-dividend).

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

--MS revenue decline in line with gradual secular mainframe market decline.

--Return to ES growth over the intermediate term following rationalization of legacy ES businesses and a mix shift to higher growth products and services including management cloud, DevOps and security.

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 on a sustained basis or event-driven merger and acquisition activity that drives leverage above 2x in the absence of a creditable de-leveraging plan.

Additionally, negative rating actions can stem from Fitch's expectation that CA's ES 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 ES that results in a more balanced revenue mix.

LIQUIDITY AND DEBT STRUCTURE

CA's liquidity position is solid supported by the new term loan and approximately $2.5 billion of cash on hand (78% offshore) as of Sept. 30, 2015 and an undrawn $1 billion revolving credit facility set to expire on June 7, 2019. In addition, expected FCF generation, primarily due to the highly profitable and recurring mainframe software maintenance revenue, adds to the company's overall financial flexibility. FCF was $545 million as of the LTM period ended Sept. 30, 2015. Fitch expects CA's annual FCF to exceed $400 million (post-dividend) from fiscal 2016 to fiscal 2018.

Pro forma for the new $300 million term loan, total debt as of Sept. 30, 2015 was $1.96 billion, which primarily consists of:

--$300 million term loan due 2022

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

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

--$400 million of 3.6% senior notes due 2020;

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

Fitch currently rates CA as follows:

--Issuer Default Rating 'BBB+';

--Senior unsecured RCF 'BBB+';

--Senior unsecured debt 'BBB+'.

Date of last rating committee: June 25, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993331

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151102006914/en/

Fitch Ratings
Primary Analyst:
William Dickson, +1-212-908-0808
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Jason Pompeii, +1-312-368-3210
Senior Director
or
Committee Chairperson:
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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