August 31, 2017 / 8:50 AM / 3 months ago

Fitch Affirms HT Global at 'BB-' On Special Dividend

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, August 31 (Fitch) Fitch Ratings has affirmed the HT Global IT Solutions Holdings Limited's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-'. The Outlook is Stable. Simultaneously, the agency has affirmed the 'BB-' rating on its USD300 million 7% senior secured notes due 2021. The affirmation reflects our view that organic growth is improving HT Global's business risk profile which offsets its high debt-related financial risk; the HT Global announced that it is planning to raise an additional USD85 million by tapping its existing USD300 million bond to pay a one-time dividend to its private-equity parent, Baring Asia Private Ltd. Notwithstanding the rating affirmation, rating headroom will be low following the transaction. The transaction is subject to bondholder approval. KEY RATING DRIVERS Low Rating Headroom: The rating headroom on HT Global's 'BB-' IDR remains low, as we expect FFO adjusted net leverage of 5.3x in 2017 and 4.8x in 2018 (2016: 5.0x) - on a proportionately consolidated basis - following the dividend payment. We analyse HT Global by proportionally consolidating its 71.3% Indian IT service subsidiary, Hexaware Technologies Limited, due to the high 29% level of minorities. We believe HT Global's strong revenue and EBITDA growth, which is consistently backed by new client wins and larger orders from existing clients, allows it to run at a higher financial leverage in the short term. We expect the owners to run the company's leverage below our revised negative guidance of 5.0x over the rating horizon. FCF Usage to Drive Ratings: HT Global could deleverage in 2018-2019, as we expect EBITDA to increase by around 12%-13% and generate about USD25 million - 35 million in FCF annually. Use of FCF is a key consideration driving HT Global's ratings. We cannot rule out another dividend over the next few years, however, management has indicated that it does not intend to pay a dividend in the next year and would prefer not to tap the capital market again to pay dividends or squeeze liquidity out of Hexaware unless financial performance is stronger than they expect. HT Global distributed USD27 million in dividends to Baring during 1Q17, as Hexaware completed a USD20 million share buyback. We expect any M&A to acquire newer technologies or expertise to be small. HT Global's ability to pay dividends to Baring is subject to an incurrence covenant of debt/EBITDA of 3.75x (2016: 3.50x) and a restricted payment basket test. Strong Revenue Growth: We forecast revenue and EBITDA to increase by 12%-13% annually during 2017-2018 driven by expanding infrastructure management services in the Asia-Pacific region. The increase is stronger than our earlier expectations of 8%-10%. Management expects revenue growth of around 14%-15% in 2017. Revenue visibility is high, as 96% of revenue is from repeat customers. HT Global has not lost any of its top-20 customers in the last decade and has take-or-pay multi-year contracts with two of its top-five customers worth of around USD110 million. Stable Profitability: We expect HT Global's operating EBITDAR margin to remain stable at around 17.5%-18.0% (2016: 17.9%), as higher utilisation levels and cost savings are likely to offset elevated staff costs. The employee utilisation rate improved to around 78%-81% in 1H17, from 70% in 2015-1H16, and the billing rate has been stable at around USD72-76 per hour for onsite billing and USD23 per hour for offsite billing. We do not foresee a complete US H1B visa ban or major restrictions on outsourcing from the US. However, stricter rules or delays in granting visas could increase labour costs for onsite staff. Senior Notes Affirmed: The senior notes are rated in line with HT Global's Long-Term Foreign-Currency IDR, as they represent its direct, unconditional, secured and unsubordinated obligations. The notes' rating will move in line with HT Global's IDR. The notes are secured by Baring's 100% equity stake in HT Global and the notes are subordinate to any potential debt at Hexaware or other operating subsidiaries. These entities do not currently have any debt and we understand management aims to keep the businesses debt-free. DERIVATION SUMMARY HT Global's IDR reflect its mid-tier position in the global IT services industry, relatively small scale and modest cost and technology advantage over peers. However, its ratings are supported by the moderate-to-high costs for its customers to switch to competitors, strong revenue growth, diversified revenue stream in terms of products and industries served and profitable niche with a solid customer base willing to work with the company on a recurring basis. We assess HT Global's business profile as a notch weaker than that of Marble II Pte. Ltd. (BB/Stable) due to Marble's larger revenue base and minimum revenue guarantee of USD990 million over five years primarily from Hewlett Packard Enterprise (BBB+/Stable) related clients, including DXC Technology Company (BBB+/Stable), HP Inc. (BBB+/Stable) and Micro Focus International plc. HT Global's 2017 FFO adjusted net leverage of 5.3x - on a proportionately consolidated basis - following the dividend payment will be slightly higher than Marble's Fitch-forecast FFO adjusted net leverage of 5.0x at end-March 2018. However, HT Global has demonstrated faster revenue and EBITDA growth and expects to beat the industry average and Marble's growth rate. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to increase by 12%-13% driven by infrastructure management services in the Asia-Pacific region. - Operating EBITDAR margin to remain stable at around 17.5%-18.0% (2016: 17.9%) on increased onsite revenue delivery mix and stable utilisation rates. - Capex/revenue to remain low at around 2% during 2017-2018. - M&A and share buybacks of about USD25 million each year starting from 2018. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to a Positive Rating Action - An improvement in proportionally consolidated FFO adjusted net leverage to below 3.5x. - An improvement in Hexaware's market position, demonstrated by a higher operating EBITDAR margin. - Growth in Hexaware's FCF to over USD75 million (2017 Fitch-forecast: USD25 million-30 million). Developments that May, Individually or Collectively, Lead to a Negative Rating Action - Higher-than-Fitch-expected shareholder returns, greater competition or loss of key customers leading to deterioration in proportionally consolidated FFO adjusted net leverage to above 5.0x (2017 estimate: 5.3x). - Operating EBITDAR margin declining to below 15% (2017 estimate: 18%) due to a lower employee utilisation rate or loss of key customers. LIQUIDITY Adequate Liquidity: HT Global's liquidity was adequate at end-June 2017, with a proportionately consolidated cash balance of USD66 million with no short-term debt maturities. The group's only debt is the 7% USD300 million senior secured notes due in 2021. It also had USD21 million in the interest-reserve account, which is classified as unrestricted cash to be used to pay for two years of interest on the senior notes. Hexaware is debt-free. Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Kelvin Ho Director +852 2263 9940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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