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Rating Action:

Moody's downgrades Sungard Availability Services' CFR to Caa1; outlook negative

26 Feb 2019

New York, February 26, 2019 -- Moody's Investors Service ("Moody's") downgraded Sungard Availability Services Capital Inc.'s ("Sungard AS") corporate family and probability of default ratings ("CFR" and "PDR", respectively) to Caa1 and Caa1-PD from B3 and B3-PD, respectively. In addition, Moody's downgraded the senior secured debt ratings to B3 from B1 and the senior unsecured bond rating to Caa3 from Caa2. The rating outlook remains negative.

RATINGS RATIONALE

The downgrade reflects uncertainty about Sungard AS's ability to refinance debt maturities over the next few years given weak revenue, profitability and cash flow trends. While Sungard AS has repaid about $95 million of debt beginning in the second quarter of 2018 using net proceeds from the divestitures of the Assurance software business (May 2018) and 3 facilities (San Ramon in June 2018, Sweden in September 2018, and Wood Dale, Illinois in January 2019), Moody's expects adjusted leverage to remain high at about 6x through at least the end of 2019.

Moody's expects that revenues and profits will continue to decrease through at least the first half of 2019 and there is uncertainty as to whether Sungard AS can start to produce positive free cash flow (FCF). The erosion of Sungard AS' core recovery business has driven total company revenue and profit declines over the past decade. While Sungard AS has reduced the capital intensity of the business and engaged in various restructuring initiatives to lower costs, the company has yet to show the ability to generate meaningful FCF (negative $36 million in 2017 and flat for the nine months ended September 30, 2018).

The transformation of Sungard AS' business model will continue to be challenged by the run off of the traditional data recovery business and pressures on co-location pricing. While managed services and cloud hosting offer solid long-term growth prospects, Sungard AS faces substantial competition and ongoing technological shifts to leaner information technology (IT) models. At the same time, the revenue base is supported by long-term relationships, a solid market position in the recovery business, some geographic diversity, and relatively low customer concentration.

With ongoing uncertainty as to whether the company can stem revenue and profitability declines, Sungard AS may find it challenging to refinance its debt over the next three years. Following the upcoming maturity of the $45.5 million revolver in September 2020 (with borrowing capacity of about $15 million as of November 13, 2018), there is a $421 million term loan due September 2021 (assuming the net proceeds from the Sweden and Greater Chicago are allocated to the term loans on a pro rata basis). This is followed by the $425 million senior unsecured notes due April 2022 and $380 million term loan due October 2022. Although Sungard AS has the potential to raise funds and reduce debt balances through further asset sales, the timing and proceeds of further asset sales is uncertain.

Despite the lack of FCF and limited revolver capacity, Moody's views liquidity as adequate over the next year given the large cash balance (which Moody's estimates at over $110 million as of December 31, 2018, pro forma for proceeds arising from the sale of the greater Chicago facility and certain property in the U.K. in January 2019). In addition, Sungard AS has demonstrated the ability to sell assets to repay debt -- e.g., the 2018 and 2019 divestitures for gross proceeds of about $140 million (net proceeds over $125 million) and the sale of 8 data centers in May 2015 for gross proceeds of $140 million, of which $110 million of net proceeds was used to repay senior secured debt. With these repayments, the company will have no further mandatory principal repayments through maturity.

The senior secured revolver is subject to 2 financial maintenance covenants: Total Secured Leverage Ratio (net of adjusted cash) of 4.5x (versus an actual ratio of 3.53x as of September 30, 2018), which steps down to 4.25x in September 30, 2019, and Minimum EBITDA amount of $186.3 million (which will be further reduced with the sale of the Greater Chicago facility; actual covenant amount of $220.9 million as of September 30, 2018). The term loans are subject to a Total Secured Leverage Ratio of 5.25x, which steps down to 5.00x as of June 30, 2019, along with the Minimum EBITDA requirement. Moody's expects the covenant cushion to tighten as of December 31, 2018 with the prospects of further narrowing in 2019, although we expect the company to remain in compliance over the next year.

The negative outlook reflects uncertainty as to whether the company can achieve an inflection point and stabilize or grow profitability over the next 18 months. Moody's projects negative to flat FCF over the next year, which is still hampered by high interest costs estimated to be about $120 million for 2019.

Sungard AS' ratings could be downgraded if further revenue and profit declines are expected to be sustained, liquidity deteriorates, or the probability of a default increases. The ratings could be upgraded with consistent revenue and profitability growth (in the low-single digits), positive cash flow, and an expectation that the debt maturities can be refinanced.

Downgrades:

..Issuer: Sungard Availability Services Capital Inc.

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

....Senior Secured Bank Credit Facility, Downgraded to B3 (LGD3) from B1 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD5) from Caa2 (LGD5)

Outlook Actions:

..Issuer: Sungard Availability Services Capital Inc.

....Outlook, remains Negative

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.

Sungard Availability Services Capital Inc. is a provider of disaster recovery services and managed IT services and is owned by a consortium of private equity investors (including Bain Capital Partners, The Blackstone Group, Kohlberg Kravis Roberts & Co., Silver Lake, TPG, and Providence Equity Partners).

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.

Stephen Sohn
Senior Vice President
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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