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Rating Action:

Moody's assigns first-time Ba2 ratings to Marble II Pte. Ltd.; outlook stable

05 Jun 2017

Singapore, June 05, 2017 -- Moody's Investors Service has assigned a first-time Ba2 corporate family rating (CFR) to Marble II Pte. Ltd. (Marble II), the special-purpose investment holding company formed by Blackstone Group and GIC Pte Ltd (unrated) to invest in the IT solutions provider, Mphasis Limited (unrated).

At the same time, Moody's has assigned a Ba2 rating to Marble II's proposed notes due 2022. The proceeds from the notes will be used to repay existing debt at Marble II, pay a dividend to shareholders, and also prefund the first 6 months of interest payments on the notes.

The rating outlook is stable.

RATINGS RATIONALE

"Marble II's Ba2 corporate family rating is supported by its 60.4% controlling interest in Mphasis, strong revenue visibility, strong cash flow generation, and Mphasis' solid liquidity profile," says Saranga Ranasinghe, a Moody's Assistant Vice President and Analyst.

Mphasis generates around 77% of its revenue from the US and around 48% from the banking, capital markets. The company should continue to benefit from the sustained reliance on outsourcing and the increase in IT spending by global enterprises on new age digital technology, such as Cloud and Big Data.

"We expect this increasing expenditure on emerging technologies to continue to be a key driver of growth for Mphasis," adds Ranasinghe, who is also the lead analyst for Marble II.

As a percentage of revenue, NewGen services in Mphasis' largest customer segment, Direct International, increased to 44% in the 12 months ended March 2017 (FY2017) from 36% for FY2015.

However, the industry is highly competitive and is exposed to policy uncertainties in key markets; for example, the US and Europe have implemented measures to restrict the entry of foreign workers and increase the creation of jobs for their own citizens. However, we expect any regulatory changes around H1B visas to have a limited impact on Mphasis given only approximately 7% of total employees worked under a H1B visa.

At the same time, Mphasis' strategic partnership with Hewlett Packard Enterprise Company (HP, Baa2 stable) guarantees $990 million of revenues for the first 5 years of the 11 year contract and provides revenue visibility. The contractual guaranteed nature of the HP revenue base supports Mphasis' credit profile and provides the company with a unique advantage over its rated peers.

The ratings also reflect Mphasis' high level of customer concentration risk. Its top 5 customers account for about 40% revenue, while the top 10 customers account for around 55% of revenue. While this is a key risk, it is balanced by long-term relationships with these customers and the integrated nature of its services into customer operations.

Marble II's proposed notes due 2022 are structurally subordinated to the creditors and cash flows of Mphasis, but will represent most of the total debt in the consolidated capital structure. Accordingly, debt service at Marble II will depend on dividends from Mphasis.

The Ba2 ratings reflect Moody's expectation that Mphasis will not increase its borrowings and that dividend flow, combined with high initial levels of liquidity at Marble II, which benefits from the prefunding of 6 months of interest requirements, will provide adequate interest coverage for note holders.

At the same time, we expect Mphasis to maintain its strong liquidity profile. It had cash and cash equivalents of around INR30 billion at the end of March 2017. Pro forma for the share buyback of INR11.1 billion, it maintains strong liquidity levels of around INR19 billion (approximately $290 million). We expect Mphasis to generate around INR11 billion of cash flow from operations, sufficient to cover around INR5.5 billion of capital expenditure and dividends.

Moreover, we expect the bond indenture to provide meaningful protections to note holders in the form of dual incurrence tests at Marble II and Mphasis. Marble II will not be allowed to incur incremental debt unless consolidated debt/EBITDA is below 3.5x. Mphasis will be allowed to incur debt up to 40% of EBITDA, but all instances must also be in compliance with the consolidated incurrence test.

Leverage, on a fully consolidated pro forma basis, will be roughly 3.0x at close (4.4x pro-rata for Marble II's 60.4% share of EBITDA). There is limited headroom available under the covenant for additional debt.

Furthermore, given the strong level of free cash flow generation and Mphasis' stated objectives of organic growth, we do not expect the two companies to incur any incremental debt in the next 12-18 months.

However, given the private equity ownership, we expect the financial strategy to favor shareholder-friendly initiatives within the confines of the proposed bond documents.

The stable outlook reflects Moody's expectation for strong revenue growth, while current strong EBITDA margins will continue over the next two years to support deleveraging to below 3.0x on a fully consolidated basis. Further, the ratings reflect our expectation that dividend payments by Mphasis to Marble II, combined with existing interest reserves at Marble II, will comfortably cover Marble II's debt service requirements on an ongoing basis.

The ratings are well positioned at Ba2. Any upward rating momentum is unlikely in the short term. However, in the medium term, the ratings could be upgraded if Mphasis continues to grow and diversifies its customer base. Leverage would also likely need to be maintained below 2.5x on a consolidated basis. Further, we would expect the company to maintain strong cash generation, such that free cash flow less share buy backs/ total consolidated debt stays above 15%.

The ratings could be downgraded if overly aggressive business acquisitions or higher-than-expected shareholder distributions cause gross leverage to exceed 3.5x on a sustained basis.

Additionally, if liquidity were to deteriorate at Mphasis, such that cash stays below USD180 million and free cash flow less share buy backs is negative, then the ratings could be downgraded.

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.

Marble II is 100% owned by Marble I Pte Ltd (unrated). In turn, Marble I is owned 86% by Blackstone Group and the rest by the Singapore wealth fund, GIC Pte Ltd (unrated). Marble II has 60.4% ownership of Mphasis II. There are no operations at Marble II and its sole asset is its investment in Mphasis stock.

Mphasis Limited is an Indian outsourced IT solutions provider. It provides application maintenance & other services (36%), application development (24%), knowledge process (15%), infrastructure management services (14%), transaction processes (7%), as well as service/technical help desk and other services (4%).

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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