London, 05 August 2021 -- Moody's Investors Service ("Moody's") has today affirmed Finastra Limited's
(Finastra or the company) B3 corporate family rating (CFR) and B3-PD
probability of default rating (PDR), as well as the B2 and Caa2
instrument ratings on the first lien and second lien backed senior secured
bank credit facilities, respectively, borrowed at subsidiaries
DH Corporation, Finastra Europe SA and Finastra USA, Inc.
Outlook on all ratings is stable.
"The ratings affirmation reflects Finastra's operating performance
strengthening over fiscal 2021, ending May 2021, and our expectation
that the company's credit metrics will remain in line with our guidance
for its B3 rating over the next 12-18 months" says Luigi
Bucci, Moody's lead analyst for Finastra.
"At the same time, free cash flow (FCF) remains limited in
the context of the company's elevated debt burden and operating
performance needs to remain on track to achieve additional deleveraging
from current levels" adds Mr Bucci.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
Finastra's B3 CFR primarily reflects its: (1) positioning
in the financial services software sector, which is supported by
positive long-term growth dynamics; (2) widely diversified
product range; (3) good revenue visibility thanks to long-term
contracts and high retention rates; and (4) adequate liquidity,
supported by the recent turnaround in FCF generation.
Conversely, Finastra's CFR is constrained by the company's:
(1) very high Moody's-adjusted leverage; (2) free cash
flow (FCF) generation, limited in the context of the high debt burden;
(3) weak interest coverage; and (4) ongoing operating performance
pressures in its non-core segments.
Moody's expects Finastra's revenues to grow at around 1%-2%
(core: 3%; non-core: -17%)
and 2%-3% (core: 3%; non-core:
-10%) over fiscal 2022 and 2023, respectively,
largely driven by subscriptions and cloud and an overall stabilization
in service revenues despite the ongoing pressures in the non-core
segment. While the rating agency believes that the pandemic may
have accelerated the demand for digitalisation in the banking industry
over the medium term, in Moody's view the ceiling for overall
revenue growth over the next three to five years lies in the mid-single-digit
range for Finastra's offering.
The rating agency expects Finastra to record company-adjusted EBITDA
growth rates in the low single digits in percentage terms over fiscal
2022 as it reinvests in the product, particularly cloud, and
impact from additional cost savings will be limited. Moving into
fiscal 2023, Moody's estimates company-adjusted EBITDA
to grow broadly in line with revenues. On a Moody's-adjusted-basis,
the evolution will be different in fiscal 2022 as the rating agency assessment
will consider future non-recurring items to be of a more recurring
nature than those booked over the past four years in the context of the
group integration and transformation after the D+H acquisition.
Moody's expects Moody's-adjusted leverage to stand at around
7.9x in fiscal 2022 (fiscal 2021: 7.6x) as lower Moody's-adjusted
EBITDA will offset the positive impact from repayments of the outstanding
RCF drawings. Leverage should then start to reduce in fiscal 2023
through EBITDA growth, ending the year at around 7.4x.
Moody's forecasts FCF to grow moderately towards $60-70
million in fiscal 2022 and $100-110 million in fiscal 2023,
supported by company-adjusted EBITDA growth and an expected reduction
in exceptional items together with a continued improvement in working
capital. Despite of the overall improvement over the course of
fiscal 2021, these levels remain limited in the context of the company's
debt levels and translate into a Moody's-adjusted FCF/debt
in the 1%-2% range over fiscals 2022-2023.
ENVORONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Social risks that Moody's considers in Finastra's credit profile
include data security because the company's systems process large amounts
of confidential and sensitive data, which increases legal,
regulatory or reputational risks. In March 2020, Finastra
was subject to a ransomware attack, which forced the company to
take offline the affected servers. While certain operations were
suspended on the back of the attack, the company reported that customer
and employee data remained untouched.
In terms of governance, since 2012, Vista has been the key
shareholder in the business. The rating agency views the financial
policy of Finastra as aggressive, as illustrated by its very high
leverage after the acquisition of D+H in 2017. Moody's
also notes frequent changes in key management over the last 12-18
months, particularly at CFO level.
LIQUIDITY
Finastra has an adequate liquidity profile, strengthened compared
to the previous year. As of the end of May 2021, the group
had a cash balance of $93 million and access to a drawn $400
million RCF ($201 million available). The current rating
and outlook assume that the RCF, due 2022, will be refinanced
well ahead of maturity. Despite the shift to subscriptions,
the group maintains a seasonal cash generation profile heavily geared
towards the second half of the year as a result of the annual collection
cycle for maintenance and some other recurring revenue.
The RCF has a springing first-lien net leverage covenant set at
7.8x, tested if 35% or more of the facility is utilised.
Headroom under the covenant test is currently ample (May 2021: 5.9x).
STRUCTURAL CONSIDERATIONS
The backed senior secured first-lien term loan is rated B2,
one notch above the CFR, reflecting its contractual seniority ahead
of the senior secured second-lien term loan, which is rated
Caa2.
The backed senior secured first-lien facilities, comprising
term loan and RCF, rank pari passu and have a security package comprising
guarantees from all material operating subsidiaries (>5% of
consolidated EBITDA) on a first-ranking basis, representing
at least 80% of consolidated EBITDA. The backed senior secured
second-lien facilities benefit from the same security package on
a second-ranking basis.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects the rating agency's expectation that
Finastra will continue improving its operating performance over the next
12-18 months such that Moody's-adjusted leverage will
remain below 8x. The stable outlook also incorporates Moody's
assumption that the company will be able to record continued improvements
in positive FCF generation while maintaining an adequate liquidity,
and not undertake debt-funded shareholder distributions or acquisitions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could come under positive pressure if: (1) the company
were to generate continuous organic revenue and EBITDA growth; (2)
Moody's-adjusted debt/EBITDA were to reduce below 6.5x (below
7.5x on an EBITDAC basis, that is, before the capitalisation
of software development costs); and (3) Moody's-adjusted FCF/debt
were to improve sustainably to 5% or above.
Moody's would consider a rating downgrade if Finastra's operating
performance were to weaken or if the company were to pursue a more aggressive
financial policy. Negative pressure on the ratings would arise
if: (1) organic revenue and EBITDA growth were to turn negative;
(2) Moody's-adjusted debt/EBITDA were to exceed 8x on a sustained
basis; or (3) FCF generation turned negative for an extended period;
or (4) liquidity were to deteriorate, including a failure to refinance
debt maturities in a timely manner.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Software Industry
published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Finastra Limited
.... LT Corporate Family Rating, Affirmed
B3
.... Probability of Default Rating,
Affirmed B3-PD
..Issuer: DH Corporation
....BACKED Senior Secured Bank Credit Facility,
Affirmed B2
..Issuer: Finastra Europe SA
....BACKED Senior Secured Bank Credit Facility,
Affirmed B2
..Issuer: Finastra USA, Inc.
....BACKED Senior Secured Bank Credit Facility,
Affirmed B2
....BACKED Senior Secured Bank Credit Facility,
Affirmed Caa2
Outlook Actions:
..Issuer: DH Corporation
....Outlook, Remains Stable
..Issuer: Finastra Europe SA
....Outlook, Remains Stable
..Issuer: Finastra Limited
....Outlook, Remains Stable
..Issuer: Finastra USA, Inc.
....Outlook, Remains Stable
COMPANY PROFILE
Headquartered in London (UK) Finastra Limited (Finastra) is a leading
financial services software provider, offering a broad range of
solutions to around 8,600 banks and financial institutions located
across 130 countries. Over fiscal 2021, Finastra generated
revenue and company-adjusted EBITDA of $1,799 million
and $771 million, respectively.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Luigi Bucci
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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Canary Wharf
London E14 5FA
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JOURNALISTS: 44 20 7772 5456
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