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Rating Action:

Moody's affirms TIBCO's B3 CFR; outlook stable

07 Sep 2022

$16 billion of rated debt affected

New York, September 07, 2022 -- Moody's Investors Service ("Moody's") affirmed TIBCO Software Inc.'s ("TIBCO") B3 Corporate Family Rating ("CFR") and assigned B2 ratings to TIBCO's proposed senior 1st lien credit facilities and notes, and a Caa2 rating to the proposed 2nd lien debt. The ratings outlook is stable. TIBCO will use net proceeds from the debt offering along with equity investments to complete its acquisition of Citrix Systems, Inc. ("Citrix").

Upon the close of the pending acquisition, TIBCO and its direct wholly-owned subsidiary, Picard Parent, Inc., which will own equity interests in Citrix, will be the co-borrowers of the credit facilities and senior notes. TIBCO will be primarily owned by the affiliates of Vista Equity Partners Management, LLC. and Elliott Investment Management L.P., and the transaction will value the combined company at approximately $24 billion. Moody's will withdraw the ratings for TIBCO's existing credit facilities upon full repayment following the close of the acquisition.

Affirmations:

..Issuer: TIBCO Software Inc.

.... Corporate Family Rating, Affirmed B3

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

Assignments:

..Issuer: TIBCO Software Inc.

....Senior Secured Bank Credit Facility, Assigned B2 (LGD3)

....Senior Secured 1st Lien Notes, Assigned B2 (LGD3)

....Senior Secured 2nd Lien debt, Assigned Caa2 (LGD5)

Outlook Actions:

..Issuer: TIBCO Software Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The B3 CFR reflects TIBCO's initially weak financial profile after the acquisition of Citrix, elevated execution risks in combining two large companies, and the highly competitive software segments that the combined company will operate in with rapidly evolving technologies. Governance considerations, specifically, the financial sponsors' high financial risk tolerance and the risk of debt-financed distributions to shareholders or acquisitions, negatively influence the credit profile. These risks are tempered by the nearly $4 billion of recurring software revenues of the combined company and the meaningful cost synergies that are expected from the combination.

Moody's expects TIBCO's revenue growth in the mid-single digits over the longer term, if the combined company successfully executes its cost savings program and growth strategy. Following the acquisition, TIBCO will focus on expanding license usage in its installed base of enterprise customers and increasing revenues from converting legacy perpetual software license users and maintenance-paying customers of the two companies to higher-value subscription offerings. TIBCO's $1 billion of revolving credit facility will provide good operating flexibility during the business model transition and while cost reductions are executed.

Moody's does not expect meaningful revenue synergies from the merging of Citrix's Application Virtualization and Virtual Desktop Infrastructure solutions, and App Delivery and Security products with TIBCO's application integration and API management, messaging, master data management, and analytics offerings. The integration risks in combining two large companies while undertaking substantial cost reductions will be high over the 12 to 18 months after the acquisition. The weakening economic conditions in the US and Europe increase downside risks to new software sales and renewals.

Although cost savings are easier to execute, large restructurings rarely come without a negative impact on software revenues in the intermediate term and the impact can occur with a lag after cost reductions are implemented. TIBCO expects to achieve $371 million of cost savings from its acquisition of Citrix. Citrix has already realized $115 million of cost savings as a standalone company under a cost saving program that was initiated in November 2021, and it expects to realize the majority of the remaining approximately $115 million of cost savings by year-end 2022. The $115 million of Citrix's remaining stand alone cost savings, together with the $371 million of combined company cost savings, represent an additional $486 million of cost savings, comprising about 10% of the total pro forma revenues (excluding Wrike's revenues). The targeted cost synergies will be key to free cash generation given high debt service costs.

Moody's also expects that Citrix's ongoing business model transition from perpetual licenses ($136 million of revenues in the LTM 2Q 2022 period) to subscription or term licenses will negatively affect reported revenues and operating cash flow over the next 12 to 18 months. Revenue and operating cash flow trends for the combined company could also exhibit some volatility due to variations in software sales mix between term licenses and Software as a Subscription (SaaS) offerings, and contract durations.

Moody's estimates that TIBCO's total debt to EBITDA (Moody's adjusted) will be very high at about 11x pro forma for the acquisition of Citrix, before the $371 million of cost savings from the combination are included in EBITDA. Leverage would be about 9x if Citrix's $323 million of stock-based compensation is excluded from EBITDA. But at least a portion of the stock-based incentives will need to be replaced with alternative cash or equity-based incentives with options to monetize the awards, under the new ownership.

The B3 CFR is supported by the combined company's good geographic and product revenue diversity and the $4 billion of revenues under software maintenance, term licenses and subscription agreements that have high gross profit margins. Citrix is the leader in the Virtual Client Computing software segment and multiple products of Citrix and TIBCO are well-regarded in their respective market segments. Although both companies have previously faced challenges in transitioning their business model toward cloud and subscription services and as well as in sales execution, their addressable markets are growing.

The track record of Vista Equity Partners in improving TIBCO's profitability since 2014 and an experienced management team at TIBCO support Moody's expectation for improving profitability of the combined company over time. The B3 CFR incorporates Moody's expectation that TIBCO's free cash flow will increase from 2% of total adjusted debt in 2023, to 5% in 2024, as cost synergies are realized and costs to achieve operating efficiencies abate. Excluding stock-based compensation expense, Moody's expects total debt to EBITDA (Moody's adjusted) to decline to 6x by the end of 2024. TIBCO will have good liquidity, primarily supported by the $1 billion of revolving credit facility.

The acquisition of Citrix will be partially financed with $2.5 billion of preferred equity investment. The preferred stock will have no maturity date, the issuer of the preferred stock (the indirect parent of TIBCO) will have the option to pay dividends in cash or equity, and all or a portion of the outstanding preferred stock can be redeemed from the proceeds from the sale of Wrike (which Citrix acquired in February 2021 for approximately $2.25 billion). The Wrike subsidiary will not be part of the restricted credit group. However, in the event the divestiture of Wrike does not materialize, or proceeds from the divestiture are insufficient to redeem the accrued amounts of the preferred stock, there will be a risk of incremental debt at TIBCO to redeem the preferred stock which has a high dividend accretion rate.

The stable outlook reflects Moody's expectation that TIBCO will realize the targeted cost savings in 12 to 18 months following the closing of the acquisition and its free cash flow will increase from 2% of total adjusted debt in 2023, to 5% in 2024.

As proposed, the new credit facilities are expected to provide covenant flexibility that if utilized could negatively impact creditors. Notable terms include the following:

Incremental debt capacity up to the greater of $2.025 billion and 100% of Consolidated EBITDA, plus unused capacity of the general indebtedness basket, plus unlimited amounts subject to the greater of  5.75x first lien leverage ratio and the ratio immediately prior (if pari passu secured). Amounts up to the greater of $2.55 billion and 125% of Consolidated EBITDA, along with any incremental facilities incurred in connection with a permitted acquisition or other investment, may be incurred with an earlier maturity date than the initial term loans.

The credit facilities allow 200% restricted payments capacity from numerous carve-outs to be reallocated to increase debt incurrence capacity.

The term loans will not include any financial maintenance covenant but the borrowings under the revolver will be subject to a springing net first lien leverage ratio covenant if revolver utilization exceeds 40% of the total commitment amount.

Non-wholly-owned subsidiaries are not required to provide guarantees; dividends or transfers resulting in partial ownership of subsidiary guarantors could jeopardize guarantees, with no explicit provisions limiting such guarantee releases. Debt up to the greater of $3.05 billion and 150% of EBITDA can be secured by non-collateral.

There are no express "blocker" provisions which prohibit the transfer of specified assets to unrestricted subsidiaries; such transfers are permitted subject to carve-out capacity and other conditions. In addition, there are no express protective provisions prohibiting an up-tiering transaction.

The final terms of the credit agreement may be different from the aforementioned proposed terms.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade TIBCO's ratings if the company generates organic revenue growth around the mid-single digits and free cash flow of 5% or higher relative to total debt on a sustained basis. Conversely, the rating could be downgraded if: (i) execution challenges or weak operating performance result in negative free cash flow for an extended period of time; (ii) growth in total recurring revenues from software maintenance, subscription and SaaS falters to the low single digits; or (iii) liquidity becomes weak.

TIBCO Software Inc. provides software solutions that connect applications or data sources, unify data, and predict outcomes. The company is owned by affiliates of Vista Equity Partners since December 2014. Citrix Systems, Inc. provides digital workspace solutions that provide secure access to business applications and content across networks; content collaboration and collaborative work management solutions; and, Applications Delivery and Security solutions.

The principal methodology used in these ratings was Software published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389867. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Raj Joshi
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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