Fitch Removes FIS from Watch Negative & Affirms IDR at 'BB+'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has removed Fidelity National Information Services, Inc. (FIS) from Rating Watch Negative and affirmed all ratings of FIS with a Stable Outlook. Fitch had previously placed FIS on Rating Watch Negative during its regular credit review in June coincident with FIS' announcement that it had made a preliminary approach regarding a possible cash offer to acquire the UK-based company, Misys PLC (Misys). FIS recently announced that those discussions have ended without an agreement. FIS also stated its intention to resume share repurchases of up to 13.6 million shares previously authorized by the Board of Directors in February 2010. This action is already incorporated into the ratings.

A key consideration of FIS' ratings is its free cash flow (FCF) conversion rate and FCF to debt leverage metrics. Fitch believes that the company's capitalization of software development costs tends to exaggerate EBITDA on a relative basis. To compensate for this potential discrepancy, Fitch places greater emphasis on evaluating FIS' leverage on a cash flow basis relative to peers.

Fitch estimates FIS' cash flow leverage (funds from operations less capex and dividends to total debt) at 12.6% for the LTM ended June 2011. This is above the median for 'BB' issuers and comparable to the 'BBB' median. Fitch expects this figure to oscillate between the two ranges going forward as the company pursues potential debt financed acquisitions or shareholder friendly actions. FIS' steady operating model and sufficient cash flow generation reflect positively on the credit relative to other investment grade issuers. However, the company's historical predisposition for debt financed acquisitions and investor friendly actions, including its strong consideration of a leveraged buyout, limit upside to the ratings. In fact, the stability of the company's cash flows combined with no meaningful financial and operational rationale for maintaining an investment grade rating, effectively limit the ratings given the company's current size as Fitch would expect any attempt to delever the company to be met by existing shareholder and outsider interest in using leverage to purchase a portion or potentially a majority of shares.

Positive rating action is currently limited by the company's size and potential for additional debt financed acquisitions and shareholder friendly actions. Negative rating action could occur if the company was to maintain leverage in excess of 3 times (x) through repeated borrowings and share repurchases. Additionally, negative rating action could occur if the company's primary customer base, small and mid-tier financial institutions, were negatively impacted by regulatory changes or severe economic events.

Rating strengths include the following:

--Stable end demand;

--Strong diversification, with increasing international diversification although highly dependent on small- and mid-tier banks;

--High switching costs.

Rating concerns include:

--History of debt M&A and shareholder friendly actions;

--High fixed cost business;

--Minimal need to maintain ratings above 'BB';

--Potential regulatory changes;

--Increasing competition from non-traditional competitors such as IBM and Oracle which have greater resources.

The rating and Outlook reflect the following considerations:

--Fitch expects revenue growth in the mid-single digits over the next several years. Revenue growth could exceed expectations if FIS has continued success in cross selling opportunities across the combined customer base of FIS and Metavante including its recently acquired services offering from Capco. Conversely, changes to financial regulations or economic factors that negatively impact small and medium sized financial institutions could result in revenue growth lagging expectations.

--Fitch expects EBITDA growth to largely track revenue growth as benefits realized from operational cost savings are offset by the growth in lower margin services revenue.

--Fitch expects FCF of approximately $700 million to $800 million annually over the next several years, which reflects approximately $300 million in annual capital expenditures plus the company's current $70 million dividend program. Fitch expects FIS to use a portion of its FCF to modestly reduce debt outstanding under its bank facilities.

--Fitch estimates leverage (total debt / operating EBITDA) as of June 2011 to be 2.8x, which has been trending lower since the company's partial debt financed recapitalization effort in the September 2010 quarter. Fitch expects leverage to remain roughly in-line with current metrics, subject to potential debt financed acquisitions or further share repurchases. Fitch estimates interest coverage (EBITDA to Gross Interest Expense) to be 6.7x as of June 2011.

--Fitch expects FIS to utilize FCF to fund additional share repurchases and potential acquisitions. While the company's unsecured notes do have a restricted payment basket, Fitch expects the company to continue to focus on shareholder returns.

Total liquidity as of June 30, 2011 was $1.3 billion consisting of approximately $900 million available under FIS' $1 billion senior secured revolving credit facility, of which $112 million expires in January 2012 with the remaining portion expiring July 2014, and approximately $427 million in cash.

Total debt as of June 30, 2011 was $4.9 billion and consisted principally of $112 million outstanding under FIS' aforementioned revolving credit facility, $325 million outstanding under a senior secured term loan A maturing January 2012; $1.8 billion outstanding under a senior secured term loan A maturing July 2014; $1.5 billion outstanding under a senior secured term loan B maturing July 2016; $600 million in 7.625% senior unsecured notes due July 2017; and $500 million in 7.875% senior unsecured notes due July 2020.

Fitch has affirmed the following ratings for FIS:

--Issuer Default Rating at 'BB+';

--$1 billion secured revolving credit facility (RCF) at 'BB+';

--Senior secured term loan A at 'BB+';

--Senior secured term loan B at 'BB+';

--$600 million in 7.625% senior unsecured notes due July 2017 at 'BB';

--$500 million in 7.875% senior unsecured notes due July 2020 at 'BB'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 13, 2010;

--'Evaluating Corporate Governance', dated Dec. 16, 2010;

--'Rating Global Technology Companies Sector Credit Factors', dated Sept. 20, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Rating Global Technology Companies - Specific Rating Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543285

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