Moody's Investor Service, November 4, 2014 report: "Rating Action: Moody's assigns B3 CFR to TIBCO Software; outlook stable"

Source: Moody's Investor Service, November 4, 2014 report

Rating Action: Moody's assigns B3 CFR to TIBCO Software; outlook stable

Global Credit Research - 04 Nov 2014

Approximately $2.7 billion of rated debt affected

New York, November 04, 2014 -- Moody's Investors Service assigned to Balboa Merger Sub, Inc., which will be merged into TIBCO Software Inc. (TIBCO), a first-time B3 Corporate Family Rating (CFR) and a B3-PD probability of default rating. Moody's also assigned a B1 rating to TIBCO's proposed first lien credit facilities comprising a $125 million revolving credit facility, a $1.65 billion term loan facility and a $300 million 1-year asset sale bridge loan facility, and a Caa2 rating to the company's proposed $950 million of senior unsecured notes. The proceeds from new debt issuance along with $1.6 billion of equity will be used to finance the acquisition of TIBCO by funds affiliated with Vista Equity Partners for approximately $4.2 billion in an all-cash transaction, including refinancing of TIBCO's $605 million of existing debt. The ratings have a stable outlook.

RATINGS RATIONALE

TIBCO's CFR is weakly positioned in the B3 rating category which primarily reflects TIBCO's weak financial profile and significant execution risk in achieving planned cost savings over the next 12 to 18 months. TIBCO's initial leverage is very high at approximately 11x total debt to LTM 3Q 2014 EBITDA (excluding $300 million of asset sale bridge facility that is expected to be refinanced from the sale leaseback of TIBCO's headquarters), though Moody's expects leverage to decline to 6x to 6.5x by FYE 2016. The projected deleveraging and free cash flow will be driven by EBITDA growth of over 50% over the next 18 months that management plans to achieve from headcount reductions and operating efficiencies in all core functions of the company.

TIBCO's software sales declined in 2013 and the YTD 3Q 2014 period and its profitability has eroded from a decline in high margin software revenues and higher operating costs. Although cost reductions will drive initial deleveraging, Moody's believes that ultimately sustained earnings growth led by revenue growth of at least mid single digit percentages will be required to enhance financial flexibility. The B3 CFR incorporates TIBCO's risks in timely attainment of synergies and generating revenue growth while undertaking significant cost reduction efforts. The company faces strong competition in both core infrastructure and analytics software segments. TIBCO will operate with limited financial flexibility as debt service costs will increase substantially. The company has modest cushion for execution missteps as management plans to accelerate revenue growth from increased sales efficiencies, growth in maintenance revenues and shifting its sales model in the analytics software segment from license- to subscription-based sales. Moody's expects TIBCO's revenue growth to remain muted in the low single digit percentages over the next 12 to 18 months and its free cash flow to increase from 3% of total debt in 2015 to approximately 6% in 2016, which will essentially represent cost savings.

TIBCO's credit profile is supported by its well-regarded application integration and event processing and analytics products in the enterprise software market. The company has good operating scale with over $1 billion in revenues and a large installed base of over 4,000 customers. Approximately 40% of TIBCO's revenues are derived under software maintenance and support agreements and these revenues have retention rates in excess of 90%. The company has historically generated the majority of its new license sales from its existing accounts.

Moody's expects the company to refinance its $300 million asset sale bridge loan within twelve months of closing of the acquisition using the proceeds of the sale of its headquarters facility.

The stable outlook is based on Moody's expectation that TIBCO will generate modest revenue growth and free cash flow of 3% of total debt in FY 2015. Moody's expects TIBCO to maintain adequate liquidity consisting of its domestic cash balances of approximately $50 million, $125 million of undrawn revolving credit facility and free cash flow.

Moody's could downgrade TIBCO's ratings if liquidity weakens or free cash flow falls short of expectations as a result of weaker than expected revenues or delays in achieving planned cost savings. The ratings could be downgraded if Moody's believes that TIBCO's total debt to EBITDA will remain above 7.5x (incorporating Moody's standard analytical adjustments) and free cash flow is expected to remain negative.

Conversely, Moody's could raise TIBCO's ratings if revenue growth increases to the mid single digit percentages and Moody's believes that total debt to EBITDA will be sustained below 6.5x and free cash flow will exceed 5% of total debt.

Issuer - Balboa Merger Sub, Inc.

...Corporate Family Rating -- B3

...Probability of Default Rating -- B3-PD

...$125 million Senior Secured 1st lien Revolving Credit Facility, due 2019 -- B1 (LGD3)

...$300 million Senior Secured Asset Sale Bridge Loan, due 2015 -- B1 (LGD3)

...$1,650 million Senior Secured 1st Lien Term Loan, due 2020 -- B1 (LGD3)

...$950 million Senior Unsecured Notes, due 2021 -- Caa2 (LGD5)

...Outlook -- Stable

TIBCO Software Inc. is a leading independent provider of infrastructure and business intelligence software. TIBCO reported $1.08 billion in revenues for the twelve months ended August 31, 2015.

The principal methodology used in this rating was Global Software Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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Raj Joshi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
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Lenny J. Ajzenman
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Corporate Finance Group
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