NEW YORK--(BUSINESS WIRE)--SunGard Data Systems (SunGard) announced that it will call its $500 million in 10.625% senior unsecured notes due 2015. This follows the company's recently launched amend and extend transaction to extend the maturity date of up to $1 billion of the $1.3 billion of Term Loans due in 2014 to Feb. 28, 2017 and renew its $880 million revolving credit facility to a new maturity of November 2016. SunGard is also asking to amend its senior secured Credit Agreement to allow for the potential spin-off of the Availability Services (AS) business segment and to modify certain other provisions of the credit agreement.
Fitch has upgraded SunGard's Issuer Default Rating (IDR) to 'B+' from 'B' with a Stable Outlook. This reflects the reduced leverage resulting from the company's decision to call its 2015 notes which is also solid evidence of management's intent to reduce leverage through free cash flow generation. This follows SunGard's recently completed divestiture of the majority of its Higher Education business segment for $1.8 billion in January 2012. SunGard utilized $1.2 billion of net proceeds from the transaction to reduce its term loans. As a result of this transaction and pro forma for the 2015 note redemption, Fitch estimates that leverage will have decreased from 6.3 times (x) at December 2011 to 4.9x once the redemption is complete on April 2, 2012. Free cash flow to total adjusted debt (adjusted for operating leases) will be near 5% following the transaction.
Fitch has also upgraded the Recovery Ratings (RRs) for SunGard's senior secured credit facility and term loan to 'BB+/RR1' from 'BB-/RR2'. This reflects the reduction in senior secured indebtedness following the term loan paydown in January, resulting in a higher recovery assumption, plus the higher IDR.
SunGard continues to move forward with the planned spin-off of its AS business. Fitch believes it is management's intention to keep leverage at or below current levels for the remaining entity (RemainCo) although the ultimate capital structure of both AS and RemainCo is uncertain. It is possible that the AS transaction might not occur or, if it does, that leverage at RemainCo actually increases post-transaction. If either scenario were to occur, the ratings would be reevaluated for potential negative action. Fitch believes that a resolution to the planned spin of AS may not occur until mid-2013.
In that regard, SunGard's business continues to face headwinds. In the latest quarter (end December 2011), organic revenue growth was -3% for both business segments (AS and Financial Services). AS revenue has been flat to modestly negative for three years running. In order for the proposed AS spin and public equity offering of RemainCo to occur, Fitch believes that these trends would need to stabilize. That said, SunGard continues to generate positive cash flow and Fitch believes it is management's intention to continue to use cash generation to reduce debt going forward.
Total debt at Dec. 31, 2011 and pro forma for the use of proceeds from the HE sale to reduce term loan indebtedness was $6.6 billion and consisted primarily of: 1) $3.05 billion of senior secured term loans, of which approximately $1.3 billion expires 2014 and $1.7 billion expires 2016; 2) $200 million outstanding under the company's on-balance-sheet accounts receivable (AR) securitization facility, which matures in September 2014; 3) approximately $242 million of 4.875% senior notes due 2014 ($250 million at maturity), which were originally unsecured when issued in 2004 but which became secured by real property in the leveraged buyout (LBO); 4) approximately $496 million of 10.625% senior unsecured notes due 2015 ($500 million at maturity which, as referenced above are being redeemed in full on April 2, 2012); 5) $900 million of 7.375% senior unsecured notes due 2018; 6) $700 million 7.625% senior unsecured notes due 2020; and 7) $1 billion of 10.25% senior subordinated notes due 2015.
As of Dec. 31, 2011, Fitch believes SunGard's liquidity position was sufficient given the company's minimal near-term debt service needs. Liquidity consisted of $868 million of cash (approximately 30% of which is located outside the U.S. and subject to repatriation tax) and approximately $850 million available under its $880 million revolving credit facility (RCF) which expires May 2013. SunGard also has approximately $90 million of availability under its aforementioned AR securitization facility. Liquidity is further supported by annual free cash flow, which Fitch expects will be at least $300 million in 2012, given expectations for flat operating profit.
SunGard's RRs reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario, given Fitch's estimates that the company's ongoing concern value is significantly higher than its projected liquidation value, due mostly to the significant value associated with SunGard's intangible assets. In estimating ongoing concern value, Fitch applies a valuation multiple of 5x to the company's discounted EBITDA. Fitch discounts SunGard's pro forma LTM operating EBITDA of $1.2 billion by 22%, approximately corresponding to the EBITDA level that would breach the company's leverage covenant in the secured credit agreement.
After reductions for administrative and cooperative claims, Fitch arrives at an adjusted reorganization value of approximately $4.8 billion. Based upon these assumptions, the senior secured debt, including $880 million revolving credit and $3.1 billion of term loan facilities recover approximately 91%-100%, resulting in 'RR1' ratings for both tranches of debt. The senior notes' 'RR4' Recovery Rating reflects the partial security these notes received during the LBO process and Fitch's belief that the secured bank debt is in a superior position due to its right to the company's intellectual property. The 'RR5' Recovery Rating for the $2.1 billion senior unsecured debt reflects Fitch's estimate that 11%-30% recovery is reasonable, while the 'RR6' Recovery Rating for the $1 billion of subordinated debt reflects Fitch's belief that negligible recovery would be achievable due to its deep subordination to other securities in the capital structure.
The following ratings for SunGard have been upgraded:
--IDR to 'B+' from 'B';
--$3.05 billion senior secured term loan due 2014 and 2016 to 'BB+/RR1' from 'BB-/RR2';
--$880 million senior secured RCF due 2013 to 'BB+/RR1' from 'BB-/RR2';
--$250 million 4.875% senior notes due 2014 to 'B+/RR4' from 'B/RR4';
--$500 million 10.625% senior unsecured notes due 2015 to 'B/RR5' from 'B-/RR5';
--$1 billion 10.25% senior subordinated notes due 2015 to 'B-/RR6' from 'CCC/RR6';
--$900 million 7.375% senior unsecured notes due 2018 to 'B/RR5' from 'B-/RR5'; and
--$700 million 7.625% senior unsecured notes due 2020 to 'B/RR5' from 'B-/RR5'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 12, 2011;
--'Evaluating Corporate Governance', dated Dec. 16, 2010; and
--'Rating Global Technology Companies Sector Credit Factors', dated Sep 20, 2010.
Applicable Criteria and Related Research:
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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