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Global Credit Research - 31 Jan 2011
Approximately $15 billion in debt affected
New York, January 31, 2011 -- Moody's Investors Service has assigned a first-time Prime-1
short term rating to Cisco Systems, Inc. ("Cisco"
or "the Company") in relation to its newly established U.S.
$3.0 billion commercial paper program. The commercial
paper notes will be unsecured, ranking pari passu with all other
unsecured and unsubordinated debt. Cisco's A1 senior unsecured
and Prime-1 short term ratings reflect its strong and defensible
market position, very strong liquidity profile, strong cash
flow generating capability and low financial leverage. As of October
31, 2010, Cisco had approximately $42 billion in total
available liquidity and $15 billion in total debt. The outlook
Moody's has taken the following rating actions:
..Issuer: Cisco Systems Inc.
....Short Term Rating, P1 Assigned
The following ratings are unchanged:
....Senior Unsecured Rating, A1
Moody's expects that commercial paper borrowings will supplement
internally generated cash and that average borrowings under the program
will be modest. Alternate liquidity is provided by a $3.0
billion revolving credit facility maturing August 17, 2012.
The committed bank facility has same day funding for U.S.
dollar loans and is not subject to material adverse changes at each borrowing.
There are no outstanding borrowings under the bank facility and Moody's
does not expect any usage over the next twelve months. The revolver
has one financial covenant which stipulates maximum interest coverage
(EBITDA/Interest) of 3:1. We estimate that this ratio stood
at 20x for the trailing twelve months ended October 30, 2010 and
we expect Cisco will remain well within covenant compliance.
Cisco holds a dominant market position within the network equipment industry,
due to its broad product portfolio, strong technology development
capabilities and scale of operations and distribution. Its deeply
entrenched position within existing networks and familiarity to end-users
is a key advantage that helps the company maintain market share.
Cisco spends heavily on R&D and supplements internal development with
an active acquisition program. Cisco continues to extend its market
reach by expanding into new product areas such as unified communications,
security, collaboration and video.
Moody's anticipates that Cisco will continue to generate double
digit percentage growth in revenues and cash flows for the next 2-3
years. Moody's projects leverage to remain flat at approximately
1.5x, assuming the company refinances current debt due in
February. Underlying these projections is free cash flow of $9.0-9.5
billion for fiscal 2011, which will likely decline slightly in 2012
as the company's previously announced regular dividend offsets growth.
However, the ratings assume that the company will reduce share repurchase
to partially offset the incremental cash outflow from the dividend.
(Moody's defines free cash flow as cash from operations less capital
investment less dividends.) Further, the ratings anticipate
that Cisco will continue to be acquisitive and that the company's
overall cash balance will remain approximately flat, despite healthy
top-line growth. Moody's estimates that Cisco will
remain comfortably within its target range of net realizable cash of $10-15
billion over the next 2-3 years.
Cisco's very strong liquidity was comprised of $3.8
billion in cash, $35.1 billion in marketable securities
and the fully available $3.0 billion revolving credit facility
as of October 30, 2010. Of the total $38.9
billion in cash and marketable securities, $35.1 billion
was held at foreign subsidiaries and potentially subject to U.S.
tax upon repatriation. Cisco has $3.0 billion of
5.25% senior unsecured notes which mature on February 22,
2011. The majority of the remaining $12.0 billion
in debt matures after 2015, with only $500 million due in
Despite its strong market position, Cisco faces competitive threats
from both sophisticated peers and low-cost producers who aim to
capture market share. Cisco must continue to innovate to remain
the technology leader, while proving to customers that its products
provide more value than cheaper competitors.
Moody's could raise Cisco's ratings if the company's
strong operating performance continues and it maintains discipline regarding
capital allocation. Additionally, evidence of success in
sustaining or growing market share and profitability would support upward
Moody's could lower Cisco's ratings if the company were to
experience profit margin compression which resulted in operating margins
below 20% on a sustainable basis, a slowdown of top line
growth or weakening of its currently robust cash flow generation capability.
Additionally, if the company were to increase its share repurchases
or dividend payout materially, negative ratings momentum could build.
The last rating action Moody's took on Cisco was on November 9,
2009 when Moody's assigned an A1 rating for the company's
senior unsecured debt issuance. The principal methodology used
in this rating was Moody's Global Communications Equipment Industry Methodology,
published in June 2008.
Cisco Systems, Inc., headquartered in San Jose,
California, is the worldwide leader in networking equipment with
revenues of $42 billion for the twelve months ended October 2010.
Cisco's products include its core routers and switches, that allow
customers to move voice, video, and data traffic across their
networks as well as internet protocol telephony, security,
storage, home networking, and other elements used in enterprise,
carrier and consumer data, voice and video networks.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Prime-1 short term rating to Cisco Systems
250 Greenwich Street
New York, NY 10007
No Related Data.
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