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Rating Action:

Moody's downgrades NCR's CFR to Ba3 on Blackstone investment and stock buyback announcement; outlook stable

12 Nov 2015

New York, November 12, 2015 -- Moody's Investors Service ("Moody's" ) has downgraded NCR Corporation's ("NCR") corporate family rating ("CFR") to Ba3 from Ba2, and probability of default rating to Ba3-PD from Ba2-PD, following the announcement that the company will buy back $1 billion of its stock. The buyback will be funded with the proceeds from the issuance of $820 million in new convertible preferred equity to the Blackstone Group and borrowings under its revolving credit facility. Moody's also downgraded the ratings on the company's senior unsecured notes to B1 from Ba3 and affirmed the SGL-2 short term liquidity rating. The rating outlook was changed to stable from negative.

Rating Actions:

Corporate Family Rating -- Downgraded to Ba3 from Ba2

Probability of Default Rating -- Downgraded to Ba3-PD from Ba2-PD

Senior unsecured notes -- Downgraded to B1-LGD4 from Ba3-LGD5

Speculative Grade Liquidity Rating, affirmed at SGL-2

Outlook -- Changed to Stable from Negative

RATING RATIONALE

The downgrade of the CFR to Ba3 reflects NCR's willingness to take on incremental credit risk to finance increased share repurchases as it is going through an ongoing business transformation amid a rapidly shifting landscape for its legacy hardware products. Moody's recognizes that competitor innovation, challenging macroeconomic forces or technology changes periodically impact the sales of the company's products. In addition the company is continuing to integrate companies it bought over the past three years, and has not yet generated consistent revenue gains to drive incremental profits and cash flow, which have mostly come from more directly controllable cost reductions. The rating also reflects the increase in financial leverage resulting from the proposed preferred equity and debt raises and the potential for debt-funded acquisitions over the next few years that could prevent further delevering.

Moody's views the preferred equity investment by Blackstone to have strong debt-like characteristics with mandated PIK accretion and a redemption option by the holders after 8.5 years. The rating agency believes that it is very likely that NCR will look to fund the redemption with debt-funded cash to avoid significant equity dilution.

NCR is already working off the elevated debt balances as a result of borrowings used to execute the recent Digital Insight (2013), Retalix (2012) and Radiant (2011) acquisitions and the pension funding programs that commenced in 2012.

Moody's Senior Vice President Gerald Granovsky said, "Moody's recognizes that the company has been engaged by activist shareholders, and we think that until the company can generate consistent revenue and cash flow growth, pressure to reward shareholders with cash remuneration will remain." Additional credit risk could arise, following debt issuances, from NCR's diminished financial flexibility, potentially limiting the company's ability to pursue prudent strategic opportunities and to defend its market share against emerging competition.

The rating is supported by NCR's stable recurring revenue stream from long-term maintenance contracts that result from the strong global market position across its core financial self-service and retail store point of sale businesses, and good geographic and customer diversification. NCR's management has broadened the scope and improved the firm's competitiveness by acquiring and expanding into higher growth, higher margin product lines that enhance its core hardware portfolio.

As such, NCR has been augmenting its product portfolios by leveraging its technology and manufacturing capabilities to offer more services and inventory management solutions as its customers deploy greater automation and e-commerce capabilities at the physical terminals. NCR is also focused on penetrating emerging markets and expanding its reach to both large and small businesses across its business units.

NCR's SGL-2 liquidity rating reflects the company's good liquidity, with a solid cash balance and a sizeable revolving credit facility. Moody's expects NCR to generate positive free cash flow of at least $800 million over the next two calendar years, with much of that generated cash to be used for debt reduction and voluntary pension contributions. NCR's increased free cash flow generation is expected to be driven by the company's improving margins due to its revenue mix and its reduced pension contributions going forward. Moody's expects the company to operate with cash balances in the $300 million to $400 million range. The company maintains an $850 million revolving credit facility as a source for external liquidity, a part of which will be used to fund the $1 billion stock buyback. The company also has a $200 million A/R securitization facility expiring in November 2016.

The ratings for NCR's debt instruments comprise both the overall probability of default, reflected in the PDR of Ba3-PD, and an average family loss given default assessment. The unrated senior secured bank credit facilities benefit from a collateral package that includes upstream guarantees of certain domestic subsidiaries, a pledge of the shares of certain domestic subsidiaries and certain international subsidiaries, and a pledge of the assets of certain domestic subsidiaries. As a result, NCR's senior unsecured notes are rated B1, LGD4 reflecting their junior position in the capital structure as the notes do not share in the collateral package with the senior secured debt holders.

The stable outlook incorporates Moody's expectation of steady top line growth, with adjusted debt + preferred stock to EBITDA expected to improve to mid-4 times range by the end of 2016.

Given the incremental credit risk involved with the proposed transaction, an upgrade is unlikely in the near term. However, NCR's rating could face upward pressure if the company successfully integrates recent acquisitions and demonstrates sustained revenue growth, operating margin improvements and delivers consistent levels of free cash flow with lower volatility. The rating could also be considered for an upgrade if the company maintains adjusted debt + preferred stock to EBITDA leverage approaching 4.0 times.

NCR's ratings could be downgraded if NCR fails to reduce leverage meaningfully such that adjusted debt + preferred stock to EBITDA is expected to be sustained at above 5 times. Additionally, the rating may be downgraded if operating performance does not improve as anticipated, the company loses market share in key business segments, or there is a deterioration in NCR's competitive position.

The principal methodology used in this rating was Global Technology Hardware published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

NCR Corporation, headquartered in Duluth, Georgia, with about $6.5 billion in revenue for the twelve months ended September 2015, has leading market positions in automatic teller machine (ATM), retail point of sale equipment, hospitality and related supplies and services markets.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Gerald Granovsky
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades NCR's CFR to Ba3 on Blackstone investment and stock buyback announcement; outlook stable
No Related Data.
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