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Rating Action:

Moody's downgrades Oracle's rating to A3; outlook stable

30 Mar 2020

New York, March 30, 2020 -- Moody's Investors Service ("Moody's") downgraded Oracle Corporation's senior unsecured rating to A3, from A1, and commercial paper rating to Prime-2, from Prime-1. The ratings outlook is stable. The downgrade was prompted by Oracle's plans to raise new debt and use proceeds for general corporate purposes, including share repurchases, payment of dividends and debt repayments. Moody's also assigned an A3 rating to Oracle's new senior unsecured notes.

RATINGS RATIONALE

The total amount of debt issuance is uncertain at this time and will depend upon market conditions, pricing and appetite for Oracle's debt. Moody's analyst Raj Joshi said, "Notwithstanding the amount raised in the current debt offering, which will likely be high, the increase in debt reflects a meaningful shift relative to our expectation that following US tax reform the company will repay maturing obligations such that total debt to EBITDA would decline to the low 2x by fiscal year ending in May '22." Oracle has rapidly transitioned from over $10 billion in net cash prior to the tax reform to $26 billion of net debt as a result of outsized levels of share repurchases.

Joshi added, "Governance risks, specifically Oracle's shareholder-oriented financial policies, are a key driver of today's rating action. Oracle's proposed debt issuance, the recent $15 billion increase in share buyback authorization, and its history of elevated share repurchases lead us to believe that Oracle's fiscal policy will continue to target aggressive share repurchases and gross leverage will remain high through FY '22." The downgrade of the senior unsecured rating by two notches reflects the company's shareholder-friendly fiscal policy and Moody's revised view that total debt to EBITDA (Moody's adjusted) could remain elevated in the high 2x to 3x range (including transition tax liabilities) by FYE '22. The lack of any specific financial policy targets increases uncertainty about credit metrics in the future.

However, Oracle has substantial scale, it is one of the largest enterprise software company globally with leading market positions in some of the largest segments of the enterprise software market, and it generates solid profitability. The A3 rating is also supported by the company's large backlog of contracted revenues, large installed base of customers, and the approximately 71% of revenues that are derived from software support and subscription services with high retention characteristics. At the same time, Oracle faces intense competition, the challenges of adapting to new technologies, and it is in the midst of a slow transition toward cloud and subscription-based services. We expect the transition to pressure profitability and cash generation over the next 12 to 24 months but it will increase revenue stability and generate higher lifetime revenues from customers. Moody's expects revenue and adjusted operating income growth of approximately 4% on a constant currency basis driven by growth in applications software revenues over the next 12 to 24 months. The A3 rating is underpinned by our expectation that leverage will trend toward 3x or lower by FYE '22 and the company will generate approximately $9 billion in annual free cash flow. Oracle maintains a $3 billion commercial paper facility but it has not utilized it since 2010. Oracle does not maintain a revolving credit facility. Moody's expects Oracle to maintain strong liquidity comprising cash balances.

The stable outlook is based on Moody's expectation that Oracle's operating profits will grow by approximately 4% and total debt to EBITDA (including tax repatriation liability) will trend toward 3x or lower by the end of FY '22.

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Moody's could downgrade Oracle's ratings if operating profit growth weakens to the low single digits for an extended period of time or Moody's expects total debt to EBITDA (including tax repatriation liability) to remain above the mid 3x as a result of operating challenges or increases in debt.

Given Oracle's elevated leverage and shareholder-friendly financial policies, a ratings upgrade is unlikely over the next 12 to 24 months. Moody's could upgrade Oracle's rating over time if the company specifically commits to a more conservative financial policy such that we expect it to maintain total debt to EBITDA (Moody's adjusted) below mid 2x while generating operating profits growth of at least in the mid-single digit percentages.

Downgrades:

..Issuer: Oracle Corporation

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A1

Assignments:

..Issuer: Oracle Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned A3

Outlook Actions:

..Issuer: Oracle Corporation

....Outlook, Remains Stable

Oracle Corporation is a leading provider of business applications software, Information Technology (IT) systems, and cloud infrastructure and platform services.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome 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 www.moodys.com.

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.

Raj Joshi
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

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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