Fitch Affirms SunGard Data Systems' Rating at 'B'; Outlook Revised to Positive

NEW YORK -- (BUSINESS WIRE) -- Fitch Ratings has affirmed the Issuer Default Rating (IDR) for SunGard Data Systems Inc. (SunGard) at 'B' and revised the Rating` Outlook to Positive from Stable. The improved outlook reflects the following considerations:

--Fitch expects SunGard to use the net proceeds of approximately $1.25 billion from the pending sale of its Higher Education (HE) business segment to reduce debt. The business being divested contributed approximately $150 million of $1.3 billion in consolidated EBITDA, per Fitch estimates, in the latest 12-month (LTM) period ending September 2011. Pro forma for the sale and debt reduction, Fitch estimates that leverage (total debt to operating EBITDA) will be reduced to approximately 5.8 times (x) from 6.2x currently (6.4x currently when adjusted for operating leases). The transaction is expected to close in first quarter 2012.

--SunGard continues to pursue a split of its Availability Services (AS) business, a plan which is contingent in part on the company receiving a favorable tax ruling from the IRS on a potential transaction. It is expected that any divestiture of the AS business would be in conjunction with an equity sale in the remaining business, potentially through a public offering. While many details remain to be clarified, Fitch believes that the ultimate plan would result in the remaining SunGard business having leverage near 5x or below. Fitch believes that this potential transaction could occur by the end of 2012 but is subject to market and business conditions.

--Fitch expects free cash flow to be above $300 million annually going forward, sufficient to fund potential small acquisitions and further debt reduction. Fitch expects leverage (total debt/operating EBITDA) to fall below 5.5x in 2012 with interest coverage of approximately 2x. Through the first nine months of 2011, SunGard has used free cash flow to reduce debt by $218 million.

Fitch believes that any potential upgrade of the rating would be contingent upon clarification and execution of any transaction related to the proposed AS spin. It would be possible for the rating to be upgraded without a spin of the AS business if metrics continue to improve. Conversely, it is possible that with a spin of AS, the remaining company could be left with materially worse metrics in which case the ratings would be maintained (or lowered). Fitch currently believes management intends for leverage to be reduced post any spin of AS, as previously mentioned.

SunGard's EBITDA-based credit metrics are relatively strong for a 'B' credit with consistently positive free cash flow. However, Fitch notes that SunGard capitalizes a significant amount of software development which if expensed would materially reduce those metrics. When evaluating SunGard's leverage on a free cash flow basis, free cash flow (excluding changes in working capital) represents approximately 4% of total adjusted debt which is more in-line with comparably rated credits.

The ratings are supported by the following:

--Strong recurring revenue profile supported by longer-term contracts and significant switching costs;

--Consistent free cash flow;

--Leading positions in each of its businesses due to its significant scale and product breadth; and

--Well-diversified customer portfolio.

Rating concerns include:

--Fitch's expectations that SunGard's debt levels and debt service requirements will remain significant over the intermediate term;

--Ongoing operating EBITDA margin erosion, due mainly to aggressive pricing related to retaining long-term customer contracts, as well as ongoing acquisitions;

--Significant exposure to and longer-term uncertainty around the size and structure of the financial services industry; and

--Integration risks associated with Fitch's belief that the company will continue its historical bias toward augmenting mature organic revenue growth rates with acquisitions.

The amorphous nature of SunGard's business presents a challenge in discerning the operating trends affecting credit metrics. Given the highly diverse nature of the business, both in terms of products and customers, there are no meaningful metrics available from the company, outside of traditional financial statement analysis, that one can use to gauge underlying operating trends. Further, there are no macroeconomic figures that provide a meaningful benchmark to gauge the relative performance of the company. As a result, it is difficult to interpret a change in revenue growth rates or EBITDA margin as a result of cyclical, customer or product specific issues rather than a broader fundamental shift in secular trends or SunGard's competitive positioning. Consequently, Fitch believes there is less flexibility inherent in SunGard's rating if negative trends in revenue growth or profitability metrics were to occur in the future.

Total debt at Sept. 30, 2011 was $7.9 billion and consisted primarily of: 1) $4.3 billion of senior secured term loans, of which approximately $1.9 billion expires 2014 and $2.4 billion expires 2016; 2) $200 million outstanding under the company's on-balance-sheet accounts receivable (AR) securitization facility, which matures in September 2014; 3) approximately $241 million of 4.875% senior notes due 2014 ($250 million at maturity), which were originally unsecured when issued in 2004 but which became secured by real property in the leveraged buyout (LBO); 4) approximately $496 million of 10.625% senior unsecured notes due 2015 ($500 million at maturity); 5) $900 million of 7.375% senior unsecured notes due 2018; 6) $700 million 7.625% senior unsecured notes due 2020; and 7) $1 billion of 10.25% senior subordinated notes due 2015.

As of Sept. 30, 2011, Fitch believes SunGard's current liquidity position was sufficient given the company's minimal near-term debt service needs. Liquidity consisted of $746 million of cash (approximately half of which is located outside the U.S. and subject to repatriation tax) and approximately $849 million available under its $880 million revolving credit facility (RCF) which expires May 2013. SunGard also had $130 million of availability under its aforementioned AR securitization facility, which has since been reduced to $90 million due to the pending divestiture of HE and removal of those receivables from the program. Liquidity is further supported by annual free cash flow, which Fitch expects will be at least $300 million in 2012, given expectations for flat operating profit.

SunGard's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario, given Fitch's estimates that the company's ongoing concern value is significantly higher than its projected liquidation value, due mostly to the significant value associated with SunGard's intangible assets. In estimating ongoing concern value, Fitch applies a valuation multiple of 5x to the company's discounted EBITDA. Fitch discounts SunGard's normalized operating EBITDA by 14%, approximately corresponding to the EBITDA level that would breach the company's leverage covenant in the secured credit agreement.

After reductions for administrative and cooperative claims, Fitch arrives at an adjusted reorganization value of approximately $4.9 billion. Based upon these assumptions, the senior secured debt, including $880 million revolving credit and $4.3 billion of term loan facilities recover approximately 71%-90%, resulting in 'RR2' ratings for both tranches of debt. The senior notes' 'RR4' Recovery Rating reflects the partial security these notes received during the LBO process and Fitch's belief that the secured bank debt is in a superior position due to its right to the company's intellectual property. The 'RR5' Recovery Rating for the $2.1 billion senior unsecured debt reflects Fitch's estimate that 11%-30% recovery is reasonable, while the 'RR6' Recovery Rating for the $1 billion of subordinated debt reflects Fitch's belief that negligible recovery would be achievable due to its deep subordination to other securities in the capital structure.

The ratings for SunGard have been affirmed as follows:

--IDR at 'B';

--$4.3 billion senior secured term loan due 2014 and 2016 at 'BB-/RR2';

--$880 million senior secured revolving credit facility (RCF) due 2013 at 'BB-/RR2';

--$250 million 4.875% senior notes due 2014 at 'B/RR4';

--$500 million 10.625% senior unsecured notes due 2015 at 'B-/RR5';

--$1 billion 10.25% senior subordinated notes due 2015 at 'CCC/RR6';

--$900 million 7.375% senior unsecured notes due 2018 at 'B-/RR5';

--$700 million 7.625% senior unsecured notes due 2020 at 'B-/RR5'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 12, 2011;

--'Evaluating Corporate Governance', dated Dec. 16, 2010; and

--'Rating Global Technology Companies Sector Credit Factors', dated Sep 20, 2010.

Applicable Criteria and Related Research:

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

Rating Global Technology Companies - Specific Rating Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543285

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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