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Rating Action:

Moody's affirms HT Global's Ba3 ratings; outlook stable

09 May 2019

Singapore, May 09, 2019 -- Moody's Investors Service has affirmed HT Global IT Solutions Holdings Limited's Ba3 corporate family rating (CFR) and the Ba3 rating on its $368 million 7% senior notes due 2021.

The outlook is maintained at stable.

RATINGS RATIONALE

"The rating affirmation reflects the strong operating performance at its 62.6%-owned operating company, Hexaware Technologies Limited, HT Global's only investment, balanced against the aggressive financial position at HT Global that limits the financial flexibility available for Hexaware to pursue growth," says Saranga Ranasinghe, a Moody's Assistant Vice President and Analyst.

Hexaware continues to perform in line with Moody's expectations, with revenue and EBITDA growth of around 12% and 7%, respectively in 2018. Moody's expects Hexaware to continue to grow organically in 2019 and 2020.

Moody's expects the global IT services industry to grow strongly over the next 12-18 months and for Hexaware to benefit from robust demand for its services. However, despite solid growth projections, the industry is facing challenges such as rising competition, pricing pressure and increasing employment costs, which has resulted in margin erosion at most companies in the industry, including Hexaware.

In August 2018, HT Global reduced its stake in Hexaware to 62.8% from 71.2% and repaid around $17 million of notes outstanding before paying a dividend to the private equity owner, Baring Private Equity Asia V Mauritius Holdings (4) Limited (BPEA). Following the stake reduction, the absolute dividends that Hexaware needs to pay to service HT Global's debt increased by around 9%.

The stake reduction follows an $85 million increase in debt in August 2017 for a dividend recapitalization.

Following the stake sale and increase in debt, both HT Global and Hexaware have limited capacity for further debt incurrence because the covenants for debt incurrence are now tighter given the lower ownership of the opcos. HT Global must satisfy the $1 debt test, where its leverage is less than the result of 3.75x (the leverage requirement for the initial 71.2% ownership stake) multiplied by an adjustment factor defined as HT Global's current ownership (62.6%) divided by its initial ownership (71.2%). HT Global's leverage at the end of 2018 at 3.2x provides limited headroom against the permitted level of 3.3x based on its 62.6% interest in Hexaware.

"Lower retained cash flows and restrictions on debt constrain Hexaware's ability to respond to changing industry dynamics," adds Ranasinghe.

HT Global's Ba3 CFR reflects the debt-free financial position and high EBITDA-to-cash flow conversion rates at Hexaware, and the strong liquidity profile of both HT Global and Hexaware. The rating also reflects Hexaware's mid-sized scale relative to large global IT and BPM service providers and its high customer and geographic concentration. In 2018, Hexaware generated 41.6% of revenue from its top 5 clients. While such customer concentration poses a key risk, it is balanced by the company's long-term relationships with these customers, the multiple contracts for each customer, and the integrated nature of its services in its customers' operations.

The stable outlook reflects Moody's expectation that revenue and EBITDA growth at Hexaware will support leverage levels within the thresholds set for the Ba3 rating. In addition, the rating reflects Moody's expectation that dividend payments by Hexaware to HT Global, combined with existing cash balances at HT Global, will comfortably cover HT Global's debt service requirements on an ongoing basis.

The Ba3 rating does not incorporate incremental dividends to HT Global's shareholders over the next 12 months, without meaningful EBITDA and cash flow growth at Hexaware.

Upward rating pressure is unlikely in the next 12 to 18 months, but could emerge if Hexaware diversifies its customer base and operations while improving its EBITDA margins to over 20% on a sustained basis. In addition, its credit profile would also need to strengthen, such that HT Global's leverage falls below 2.5x on a consolidated basis, proforma for any BPEA dividends.

The rating could be downgraded if Hexaware shifts its financial strategy from one focused on organic growth to an overly aggressive acquisition-driven strategy. Specifically, Moody's could downgrade the rating if; (1) Hexaware's consolidated leverage rises above 3.5x; (2) the company's combined cash holdings at HT Global and Hexaware fall below $40 million; (3) cash flow from operations at Hexaware falls below $60 million on a rolling 12-month basis; and (4) dividends to HT Global shareholders increase further and/or there are further stake reductions by HT Global over the next 12-18 months, without a meaningful increase in EBITDA and cash flow at Hexaware.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

HT Global IT Solutions Holdings Limited is a company incorporated under the laws of Mauritius -- formed by Baring Private Equity Asia V Mauritius Holdings (4) Limited (BPEA) -- to invest in the IT and BPM service provider, Hexaware Technologies Limited. The company has no other operations, employees or real investments.

Incorporated in India, Hexaware provides IT and BPM outsourced services largely to US-based multinational corporations. Hexaware listed on the Mumbai Stock Exchange in 2001.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Saranga Ranasinghe
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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