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15 Nov 2004
9:45 AM (EST)
Fitch Ratings-New York-November
15, 2004: Fitch Ratings has initiated coverage of Computer
Associates (CA) and assigned an initial rating of 'BBB-' to the
company's senior unsecured debt, including today's announced $750
million senior unsecured 144A private bond transaction, consisting
of two tranches due 2009 and 2014. Proceeds from the offering will
be used for debt refinancing and general corporate purposes. CA's
commercial paper (CP) program is rated 'F3'. The Rating Outlook is
Stable. Fitch's action affects approximately $3.1 billion of debt
securities.
The ratings reflect the company's
consistent free cash flow in excess of $1 billion annually and
solid financial flexibility, improving credit metrics, the size,
diversity, and quality of the company's installed base (equal to
95% of Fortune 500) and depth of product line, resulting in
recurring revenue and solid customer retention and high barriers
to entry with significant switching costs. The corporate software
market continues to grow for operations management, security, and
storage software, which are core competencies of CA. Concerns
center on potential ongoing acquisitions for add-on software
capabilities and growth, strong competition from larger, more
diversified rivals, the absence of a permanent CFO and CEO (but
appointments are expected to be announced in the near term), and
the company's desire to expand its channel business.
Additionally, while a legal
agreement was reached with the Department of Justice (DOJ) and
Securities & Exchange Commission (SEC) in September 2004, the
credit ratings for CA assume that the company will improve its
corporate governance and internal controls and satisfy any
additional recommendations by the government-appointed independent
examiner as required under the agreement. The review will take
place for at least the next 18 months, during which time, if CA
violates the terms of the agreement, the current prosecution
charges will remain and further legal action against CA could be
taken. Previous misstatements of earnings resulting from improper
revenue recognition and weaknesses in accounting controls related
to timing of revenue recognition were the subject of shareholder
lawsuits and government investigations and have required
significant litigation and settlement costs from 2001-2004. As
part of the agreement, CA also agreed to establish a $225 million
restitution fund to compensate CA shareholders. This
tax-deductible cash payment will occur in three separate $75
million payments, of which one has already been completed.
CA's credit metrics have improved
in the past few years as a result of ongoing debt reduction, solid
and consistent free cash flow, and improving earnings. Leverage,
measured by total debt to cash flow from operations was 1.7 times
(x) as of the second quarter of fiscal 2005 ending Sept. 30 versus
nearly 2.4x at fiscal year-end 2003 and approximately 3.1x for
fiscal 2002. Interest coverage, measured by cash flow from
operations to interest expense, increased to more than 10x for the
same time period, compared with nearly 7x for 2003 and 5x for
fiscal 2002. While it is anticipated that credit protection
measures will decline moderately for the next two quarters as a
result of the aforementioned debt offering, Fitch anticipates that
these measures will continue to trend positively over the
intermediate term as a result of further debt reduction and, to a
lesser degree, earnings improvement.
Total debt as of Sept. 30, 2004,
was approximately $2.3 billion ($3.1 billion on a pro forma
basis), down from $3.1 billion in fiscal 2003 and $3.8 billion in
fiscal 2002. At the end of the second quarter, debt consisted of
four tranches of senior notes and senior convertible notes (all
pari passu), with no commercial paper or bank revolver borrowings
outstanding. CA's maturity schedule, which Fitch believes is
manageable, includes $660 million 5.0% convertible senior notes
due March 2007 but callable in March 2005, $825 million due April
2005, $350 million due April 2008, and $460 million of 1.625%
convertible senior notes due December 2009 (non callable).
CA's liquidity is solid with
approximately $2.3 billion (approximately $3.1 billion pro forma
the bond offering) in cash, cash equivalents, and marketable
securities, as well as strong and consistent free cash flow.
Annual free cash flow (cash flow from operations minus capital
spending and capitalized development costs) was nearly $1.3
billion for the latest twelve months ending Sept. 30, 2004 and has
been approximately $1.2 billion for the preceding four fiscal
years. The company's liquidity is also enhanced by an undrawn $470
million three-year U.S. revolving credit facility expiring in
January 2005, with the most significant covenant being total debt
to cash flow from operations not allowed to exceed 3.25x. CA also
has a $400 million CP program that is not utilized. In addition to
meeting debt maturities, CA must contribute $150 million for the
remaining portion of the restitution fund in two $75 million
installments on September 2005 and March 2006, as well as fund the
recent Netegrity acquisition ($340 million net).
Contact: Nick P. Nilarp, CFA
+1-212-908-0649, Brendan Buckley +1-212-908-0640, or Jason Pompeii
+1-212-908-0668, New York.
Media Relations: Brian Bertsch
+1-212-908-0549, New York
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Fitch
Initiates Coverage of Computer Associates at 'BBB-'; Outlook Stable