April 24, 2017 / 1:59 PM / 7 months ago

Fitch Assigns Misys First-Time IDR of 'BB-'; Outlook Stable

(The following statement was released by the rating agency) CHENNAI/DELHI/MUMBAI/SINGAPORE, April 24 (Fitch) Fitch Ratings has assigned a first-time 'BB-' Long-Term Issuer Default Rating (IDR) to certain borrowers that are subsidiaries of Misys Limited, including Almonde, Inc., Tahoe Bidco Canada, Inc., Misys Europe SA (the borrowers), and Tahoe Subco 1, Ltd. (as parent guarantor and indirect parent of Misys Limited). Fitch has assigned a 'BB+'/'RR1' rating to the borrowers' US$4.2 billion first lien senior secured term loan and $400 million first lien senior secured revolving credit facility (RCF), as well as a 'BB-'/'RR4' rating to the US$1.15 billion senior secured second lien term loan, all of which are part of the transaction financing for the merger of Misys with DH Corporation (D+H) in a transaction expected to close prior to the end of the third calendar quarter of 2017. The IDR and issue ratings assigned reflect the credit profile of Misys following the merger with D+H, and are not applicable to the existing debt of Misys or D+H. The existing debt obligations of Misys and D+H will be refinanced in their entirety when the transaction closes. A full list of rating actions follows at the end of this release. On March 13, 2017, Vista Equity Partners signed a definitive agreement to acquire D+H, a Canadian-based financial services software provider and announced plans to merge it with Misys, one of Vista's portfolio companies, to create a diversified financial services software provider with global reach. The combined company will have approximately US$2.2 billion in annual revenues, operate in approximately 130 countries, and provide solutions to 48 of the 50 largest banks ranked by assets. The ratings reflect the stability provided by the company's high proportion of recurring and relatively predictable revenues, the diversity of the company's customer base, which has a low exposure to any one customer. These factors are partly offset by its high initial leverage and segment concentration as nearly all offerings serve its financial institution customer base. Fitch believes the acquisition of D+H enhances the product position of Misys as well as provide it with a more significant and complementary position in North America. KEY RATING DRIVERS Transaction: Vista will acquire all outstanding shares of D+H for CAD25.50 per share. Along with debt assumed in the transaction, including issued convertible debentures, the transaction has an enterprise value of approximately CAD4.8 billion. Stable Market Demand: Fitch believes Misys's mission-critical financial software products, strong level of recurring revenue, and sustained outsourcing trends by Misys's financial institution customer base provide a significant degree of visibility into future revenues and cash flow. Approximately 71% of the post-acquisition revenues are recurring (45% recurring maintenance and subscription revenues and 26% of revenues highly predictable with some economic sensitivity). Retention rates are high at over 90%. End-Market Concentration: Misys offers a broad portfolio of products to banks and other financial institutions. Given its product and geographic diversity, it does not have significant exposure to any one customer. However, the company has significant exposure to banks and other financial institutions, which exposes it to fluctuations in the level of banking activity that has some sensitivity to the economy as well as sector consolidation trends. Favorable Outsourcing Trends: Fitch believes that financial institutions will continue to look to third-party software providers to outsource certain functions as they focus on core competencies, streamline processes and reduce costs. Misys's software can be used across a broad array of functions in retail banking, corporate banking and in banks treasury and capital market functions. Financial institutions continue to be under pressure due to regulatory cost burdens and also need to invest in technology to provide innovative products and services. Misys's software enables banks to integrate internet and mobile banking into their product offerings. Scalable Business: Fitch believes Misys's business is scalable, as its software solutions can be developed once, then deployed many times across a broad customer base. Over the coming years, banks are expected to grow their use of third-party packaged software that can be integrated into their existing operations. Misys's products are open and modular so they can fit into a banks existing infrastructure, working with either the bank's own systems or with third-party software. Leverage: Following the acquisition of D+H, Misys's gross leverage will exceed 6x. Fitch expects approximately three-fourths of the synergies to be realized in the first six months after the close of the transaction leading to a material reduction in run-rate leverage. M&A Risk: Following the acquisition of D+H, other than small bolt-on acquisitions, Fitch does not expect Misys to engage in significant M&A activity in the near term as the company focuses on the integration of D+H's operations over an 18-month period or so. In the longer term, Fitch would expect Misys to continue to review potential acquisitions to expand its geographic footprint and product offerings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Fitch expects organic revenue growth in the low- to mid-single digits, but closer to the mid-single digits excluding the cheque business of D+H (which is in long-term secular decline); --EBITDA margins are expected to expand to the mid-40% range over the rating horizon as synergies are realized from the acquisition of D+H; --No revenue synergies from upsell/cross-sell opportunities are in the forecast but could provide upside to the base case; --Near-term expected cash flows incorporate upfront expenses to achieve the anticipated synergies; --Fitch does not expect material acquisitions in the near term but recognizes growing cash balances over the forecast horizon could accommodate modest levels of bolt-on acquisitions. RATING SENSITIVITIES Positive Rating Action: Positive action could occur if the credit profile continues to strengthen and gross leverage is expected to remain around 5.0x or below. Future developments that may lead to positive rating action include sustained EBITDA growth and continued reductions in debt from the projected strengthening in the company's FCF position. Negative Rating Action: A negative action could occur if Misys does not appear to be on track to reduce leverage below 6.0x within an 18-to-24-month period after the close of the transaction, if there is a material erosion in its market share, or if margins do not improve as anticipated from the realization of synergies from the D+H acquisition. Sustained declines in constant currency maintenance and subscription revenue, which Fitch considers recurring revenue, could also potentially trigger a negative rating action. LIQUIDITY D+H Transaction Financing: Planned debt financing will consist of a US$400 million senior secured first lien RCF (undrawn at close), US$4.2 billion in the form of a senior secured first lien term loan B, and US$1.15 billion in the form of a senior secured second lien term loan. Estimated tranches for the first lien senior secured term loan will consist of a US$3.12 billion tranche and a EUR1 billion tranche. A portion of the financing will be used to pay off, in their entirety, the existing debt of both Misys and D+H. Vista Equity Partners and funds related to Vista, along with Misys's management, will contribute the remaining equity financing for the transaction. For liquidity purposes, the company will have a US$400 million, undrawn RCF at the close of the transaction. In addition to an undisclosed amount of cash expected to be on the balance sheet following the close of the transaction, additional liquidity is expected to be generated by Misys's free cash flow. Fitch expects initial annual FCF above US$200 million following the close of the acquisition, rising to above US$300 million annually in the second year after the transaction closes owing to the realization of cost synergies and substantially lower integration costs. The company is not expected to have any significant debt maturities over fiscal years 2018-2020. FULL LIST OF RATING ACTIONS Fitch assigns the following ratings to Misys, with a Stable Outlook: Tahoe Subco 1, Ltd. --Long-Term IDR 'BB-'. Almonde, Inc. Tahoe Canada Bidco, Inc. Misys Europe SA --Long-Term IDR 'BB-'. --$400 million senior secured first lien revolving credit facility 'BB+'/'RR1'; --$4.2 billion senior secured first lien term loan 'BB+'/'RR1'; --Up to $1.55 billion senior secured second lien term loan 'bb-'/'RR4'. Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1-312-368-5471 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Date of Relevant Rating Committee: April 17, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Preferred equity has been given 100% equity credit. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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