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Rating Action:

Moody's confirms Unisys's corporate family rating at B2; outlook positive

17 Mar 2020

New York, March 17, 2020 -- Moody's Investors Service, ("Moody's") confirmed Unisys Corporation's ("Unisys") Corporate Family Rating ("CFR") at B2, Probability of Default Rating ("PDR") at B2-PD, and senior unsecured rating at B3. Moody's upgraded the Speculative Grade Liquidity ("SGL") rating to SGL-2 from SGL-3. The outlook is positive. This rating action concludes the rating review for upgrade initiated on February 7, 2020.

On March 13, 2020, Unisys completed the sale of its US Federal business to Science Applications International Corp. ("SAIC") for $1.2 billion in cash (the "Divestiture"). Unisys plans to use the net proceeds for the principal and premium required to redeem all of its $440 million of 10.75% Senior Secured Notes ("Senior Secured Notes") and to make a pension contribution of approximately $600 million.

Ratings Confirmed:

..Issuer: Unisys Corporation

.... Corporate Family Rating, Confirmed B2

.... Probability of Default Rating, Confirmed B2-PD

....Senior Unsecured Conv./Exch. Bond/Debenture (Local Currency) Mar 1, 2021, Confirmed B3 (LGD4) from (LGD5)

Rating Upgraded:

..Issuer: Unisys Corporation

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

Outlook Actions:

..Issuer: Unisys Corporation

....Outlook, Changed To Positive From Rating Under Review

The senior secured rating will be withdrawn following repayment of the Senior Secured Notes.

RATINGS RATIONALE

The positive outlook and the upgrade of the liquidity rating to SGL-2 reflect the expected redemption of the Senior Secured Notes and the planned prepayment of the next three years of required cash funding payments on the US pension plan. These payments will reduce the interest expense burden, improve financial leverage, and greatly enhance the near to intermediate term liquidity profile. Moody's estimates that the bond redemption and pension prepayment will improve leverage to the mid to upper 4x level from 5.7x debt to EBITDA (year ended December 31, 2019, Moody's adjusted). The lower interest expense and reduced future pension payments will provide Unisys with greater financial flexibility to invest in the business to improve the company's competitive position.

Unisys reports that existing US Federal clients who use proprietary Unisys products, such as Stealth, Clearpath Forward, and Intelliserve, will continue to generate license revenues for Unisys. As SAIC grows the US Federal business, this may provide a revenue driver for Unisys license revenue streams from these products.

Unisys's B2 CFR reflects the large base of recurring services revenue (70% of 2019 total revenues) based on contracts of 3 years or more, which contributes to revenue predictability. The diverse end markets that Unisys will continue to serve (Commercial, Financial Institutions, and Public Sector) also contributes to revenue stability given the differing demand drivers of each of these separate end markets.

Still, there are key execution risks to the Divestiture, which are magnified by the broader economic uncertainty wrought by the global novel coronavirus outbreak. The company has stated publicly that US Federal business is both more profitable and less capital intensive than Unisys's remaining business. Thus, the Divestiture may cause Unisys's profitability and cash flow generation to decline in the near term. Moreover, key elements of the company's new operating plans have yet to be disclosed, including details on the corporate strategy following the Divestiture, the role of acquisitions in building competitive advantage, and the firm's financial policy. Although Unisys is confident that there will be immaterial tax impact from the Divestiture due to the Tax Asset Protection Plan, the final outcome may be subject to review by the tax authorities. Longer term, required payments on the US and international pensions are scheduled to increase to $226 million in 2023 and $249 million in 2024 from about $40 million annually for the years 2020 to 2022. Accordingly, Moody's believes that Unisys will need to access the capital markets over the next few years to fund these payments.

The positive outlook reflects Moody's expectation that Unisys will experience no worse than low single digits percentage organic revenue decline over the next 12 to 18 months in spite of the slowing global economy and the disruptions caused by the pandemic. Since Unisys reports that the US Federal business operated largely separately from the other Unisys operations, Moody's expects that the Divestiture will not result in material operational disruption at Unisys. Moody's expects that profitability and cash flow generation will improve over the period such that free cash flow ("FCF") to debt will improve toward the mid-single digits percent level.

The rating could be upgraded if:

• Unisys generates organic revenue growth at least in the low single digits percent and

• FCF to debt (Moody's adjusted) is sustained at least at the mid single digits percent level

• Unisys takes steps required to bring the US and international pension plans to fully-funded status

• Unisys maintains a conservative financial policy

The rating could be downgraded if:

• organic revenues decline by more than 5% or

• profitability or cash flow generation weaken such that FCF to debt (Moody's adjusted) is not on track to exceed the low single digits percent level

The SGL-2 rating reflects Unisys's good liquidity. Although Moody's expects Unisys to generate only modest amounts of FCF before pension funding requirements, liquidity is supported by the cash balance ($539 million at December 31, 2019). Liquidity is also supported by the $145 million Revolver due October 2022 ("Revolver"), which is secured by accounts receivable. As of December 31, 2019, the Revolver had available borrowing capacity of about $139 million and Moody's expects that Unisys will be in compliance with the financial covenant over the next year. Although Unisys's planned US pension prepayments will eliminate cash funding requirements until 2023, Unisys will still need to make about $40 million in annual funding payments for the international pensions over the next year.

The B3 rating on the Convertibles, which is one notch lower than the B2 CFR, reflects the absence of collateral and the existence of a Revolver, which is structurally senior to the Convertibles.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Unisys also faces moderate social risk surrounding the data security of its clients. Moody's considers Unisys's governance risk as low, since Unisys is a public company with a broad investor base and an independent board of directors. Given Unisys's exposure to the competitive IT services industry and unfunded pension obligation, Moody's expect that Unisys's financial policy will remain conservative with cash flow generation used to make contributions to its pension plan. Unisys's environmental risk exposure is low, since the company is not a direct source of pollution and does not have any unusual exposure to environmental hazards.

Unisys Corporation ("Unisys"), based in Blue Bell, Pennsylvania, provides information technology (I/T) services and enterprise server hardware worldwide. Unisys competes against similar-sized peers as well as much larger I/T services and hardware vendors including IBM, Accenture, Hewlett Packard Enterprise, and a number of services providers located in India, including Infosys and Tata Consultancy Services.

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.

REGULATORY DISCLOSURES

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.

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.

Terrence Dennehy, CFA
VP - Senior Credit Officer
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

Stephen Sohn
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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