Fidelity National Information Services (FIS) recently announced that it is set to raise $700.0 million (instead of $500.0 million) by issuing 5.0% senior notes maturing 2022, through a private placement. The offer is expected to close by March 19, 2012. Fidelity expects to use the net proceeds to pay off some of its secured debt in the near term.
Only qualified institutional buyers are allowed to buy these senior notes as per regulations set by Rule 144 A under the Securities Act of 1933. Foreigners can also purchase these notes, by following the rules set in Regulation S under the same act.
The Senior Notes have a “BB+” issue rating (up from BB-) with “3” recovery rating (up from 5) as per credit rating agency Standard & Poor’s latest release. The '3' recovery rating states that in case of default, creditors will be able to recover 50% to 70% of their investment.
Fidelity’s growth in recent years has been primarily driven by acquisitions, which were many a times funded by raising long-term debt. This high level of indebtedness has been a major concern for Fidelity over the last couple of years. However, we believe that the recent S&P rating upgrade reflects a lower debt level in 2011.
At the end of December 31, 2011, total debt was $4.81 billion compared with $5.19 billion reported at the end of 2010. The company’s net cash position (cash less debt) also improved from $4.85 billion to $4.39 billion at the end of fiscal 2011.
Most significantly, debt-capital ratio improved from 44.8% in fiscal 2010 to 42.5% in fiscal 2011. Debt-to-EBITDA also improved 2.8 times at the end of fiscal 2011 compared with 3.2 times at the end of 2010. From 2012-2015, Fidelity expects debt-to-EBITDA to remain within the 2.0 times to 2.5 times range, much lower than the current level.
We believe that the company may use the net proceeds to pay off its credit revolver outstanding ($175.0 million) and part of its secured debt in the near term. Currently, Fidelity has a term loan outstanding of $2.09 billion, which is scheduled to mature in 2014. Further, the company expects to refinance term loan B ($1.25 billion and due 2016) to reduce interest expense. Fidelity paid interest expense of $264.8 million, up 47.4% year over year in fiscal 2011.
We believe that Fidelity’s commanding position in the financial services market, increasing international exposure, recurring revenue model, diversified product portfolio; cost synergies from acquisitions, a loyal customer base and improving free cash flow will drive growth over the long term. We also believe that Fidelity’s expansion into the emerging markets of Brazil, India and China will drive organic revenue growth going forward.
However, we believe that Fidelity’s balance sheet will remain highly leveraged for the next couple of years as the company continues to undertake debt refinancing activities and extend maturities through issuance of new bonds. This coupled with increasing consolidation in the banking sector, challenging environment for the Payments Solutions business, increasing competition from Fiserv Inc. (FISV) and uncertain regulatory environment remain the primary headwinds, in our view.
We, therefore maintain our Neutral recommendation on a long-term basis (for the next 6 to 12 months). Currently, Fidelity has a Zacks #2 Rank, which implies a short-term Buy rating (for the next 1-3 months).Read the Full Research Report on FIS
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