Fitch Affirms Computer Associates at 'BBB-'; Stable Outlook.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has affirmed Computer Associates, Inc.'s (CA) issuer default rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) at 'BBB-', the company's senior unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. at 'BBB-', and its commercial paper (CP) program at 'F3'. Fitch has also assigned a 'BBB-' rating to CA's $1 billion senior bank credit facility due December 2008. The Rating Outlook is Stable. Fitch's action affects approximately $1.8 billion of debt securities. The ratings and Outlook reflect the company's consistent free cash flow, solid financial flexibility, improving credit metrics, and high barriers to entry with significant 'switching' costs. Also considered are the size, diversity, and quality of the company's installed base (99% of Fortune 500) and depth of product line, resulting in recurring revenue and solid customer retention. CA's annual free cash flow has exceeded $1 billion the last seven years and Fitch believes this trend will continue for the intermediate term. Credit metrics continue to trend positively mostly as a result of debt reduction balanced with improving cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses . As anticipated for Fitch's initial rating, CA achieved its previous commitment of reducing total debt to seven-year-low levels. The corporate software market continues to grow for operations management, security, and storage software, which are core competencies of CA. Ratings concerns mainly center on the potential uses of the aforementioned strong and consistent free cash flow (defined as cash flow from operations minus capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. ), capitalized development costs, and dividends. Fitch's ratings incorporate the company's current policy of utilizing approximately 50% of annual free cash flow ($500 million-$600 million) for acquisitions for add-on software capabilities and growth, and $600 million for stock repurchases. However, Fitch believes the potential exists for CA to become more aggressive in share buyback plans, dividend policy, or participation in the consolidating software industry by pursuing a debt-financed acquisition. Fitch is also concerned about signs of a slowing and more challenging mainframe market, the integration that has to occur for various acquisitions the last few quarters, and strong competition from larger, more diversified rivals. Although reduced, Fitch believes ongoing risk remains for meeting corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. and internal controls initiatives to satisfy any additional recommendations by the government-appointed independent examiner as required under the company's agreement with the Department of Justice (DOJ (Department Of Justice) The legal arm of the U.S. government that represents the public interest of the United States. It is headed by the Attorney General. ) and Securities & Exchange Commission (SEC) in September 2004. Fitch believes a satisfactory conclusion to the independent examiner's reports (anticipated in the second half of calendar 2006) and a continued disciplined approach to acquisitions and shareholder activity could become positive factors for CA's ratings. CA's credit metrics have improved the last few years as a result of ongoing debt reduction, solid and consistent free cash flow, and improving earnings. Leverage, as measured by total debt to cash flow from operations, was 1.2 times (x) as of the third quarter of fiscal 2006 (ended Dec. 31, 2005), versus 1.7x at fiscal year-end Fiscal Year-End The completion of a one-year, or 12-month, accounting period. Notes: The reason that a company's fiscal year often differs from the calendar year and does not close on Dec 31, is due to the nature of company's needs. 2005 and nearly 2.4x at fiscal year-end 2003. Interest coverage, measured by cash flow from operations to interest expense, has improved even more dramatically to approximately 15x for the same time period compared to nearly 10x for fiscal 2005 and 7x for fiscal 2003. Fitch believes credit metrics will remain stable over the intermediate term due to earnings improvement challenges and despite the opportunity for further deleveraging over the next couple of years due to manageable debt maturities. Total debt as of Dec. 31, 2005, was approximately $1.8 billion, down from $2.3 billion in fiscal 2004 and $3.1 billion in fiscal 2003. At the end of the third quarter, debt consisted of four tranches of senior notes and senior convertible notes (all pari passu [Latin, By an equal progress; equably; ratably; without preference.] Used especially to describe creditors who, in marshalling assets, are entitled to receive out of the same fund without any precedence over each other. PARI PASSU. By the same gradation. ), with no commercial paper or bank revolver borrowings outstanding. CA's maturity schedule includes $350 million due April 2008, $500 million due December 2009, $460 million of 1.625% convertible senior notes due December 2009 (non-callable), and $500 million due 2014. As part of the aforementioned agreement with the SEC and DOJ, CA agreed to establish a $225 million restitution fund to compensate CA shareholders. The company has one remaining $75 million payment, which Fitch expects will be funded by the end of the first calendar quarter. CA's liquidity is solid with approximately $1.8 billion in cash and equivalents as well as solid and consistent free cash flow. Annual free cash flow (cash flow from operations minus capital spending, capitalized development costs, and dividends) was $1.2 billion for the latest 12 months ending Dec. 31, 2005. The company's liquidity is also enhanced by an undrawn un·draw tr.v. un·drew , un·drawn , un·draw·ing, un·draws To draw to one side, as a curtain. Adj. 1. undrawn - not represented in a drawing undelineated - not represented accurately or precisely $1 billion four-year U.S. revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facility expiring in December 2008, with the most significant covenant being total debt to cash flow from operations not allowed to exceed 2.75x. CA also has a $400 million CP program which is currently not being utilized. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this if site. |
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