|By Business Wire||
|June 30, 2014 12:08 PM EDT||
Fitch Ratings has affirmed the ratings of Oracle Corp. (Oracle) at 'A+', including the long-term Issuer Default Rating (IDR). The affirmation follows the company's announcement that it will access the debt capital markets. The net proceeds of the proposed offering will be used for general corporate purposes, including stock repurchases, dividends, future acquisitions, including Oracle's pending acquisition of MICROS Systems, Inc. (MICROS; expected to close in the second half of 2014), and repayment of debt (including the 3.75% senior notes due July 2014; $1.5 billion principal amount outstanding).
Furthermore, Fitch has assigned an 'A+' rating to Oracle's proposed issuance of senior unsecured notes. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
The rating actions affect approximately $27 billion of total debt, including the company's undrawn $3 billion unsecured revolving credit facility (RCF).
KEY RATING DRIVERS
The Ratings and Outlook reflect:
--Significant financial flexibility, with cash and investments totaling $38.8 billion as of May 31, 2014 ($35.2 billion offshore), an undrawn $3 billion RCF due 2018 and sustained annual free cash flow (FCF) after dividends in excess of $11 billion in the past three fiscal years (FYs). Oracle reported FCF of $12.2 billion in FY 2014 (May 31), in-line with Fitch's expectations.
--Strong customer attach-and-renewal rates for software maintenance, resulting in a steadily increasing, highly profitable (93% gross margin) recurring revenue stream that significantly reduces FCF volatility. Despite flat new license revenue, software maintenance grew 6.2% and accounted for nearly 48% of total revenue in FY 14.
--Strong competitive position, especially in database and middleware software.
--Conservative financial policies and strong credit protection metrics.
--Size and diversity with respect to its installed software base and significant switching costs associated with mission-critical enterprise software.
--Established track record of integrating acquisitions.
Fitch's rating concerns are:
--Competition from open-source software and long-term profitability of Oracle's SaaS and PaaS offerings (cloud subscriptions) relative to traditional on-premise software.
The direct controllable profit on new software licenses and cloud subscriptions, excluding stock-based compensation, declined 8% to $3.7 billion in fiscal 2014. The decline reflects: i) a revenue mix shift toward cloud subscriptions and associated delay in revenue recognition compared with a traditional license; and ii) a 500 basis points decline in the controllable gross margin for cloud subscriptions to 60.2% due to incremental expenses to support cloud subscription growth.
Fitch believes Oracle has and will continue to make significant investments, both organic and inorganic, to retain its long-term competitiveness relative to other cloud subscription providers. Oracle's cloud subscription revenue was $1.1 billion in fiscal 2014, or more than 10%, of aggregate revenue from new licenses and cloud subscriptions.
--Aggressive acquisition strategy; however, Fitch expects the company will remain disciplined with its strategy and, in the event of a major debt-financed acquisition, will reduce leverage using FCF in lieu of meaningful share repurchases.
--Material and sustained growth in cash returned to shareholders via stock repurchases and dividends since fiscal 2012 as well as U.S. acquisitions increase Oracle's external U.S. funding requirements due to significant offshore cash and FCF generation that is subject to incremental taxation upon repatriation. As of May 31, 2014, $35.2 billion, or 91%, of Oracle's total cash and investments of $38.8 billion was held by foreign subsidiaries.
Fitch believes the company's lack of a strategic rationale to maintain a higher rating at the expense of financial flexibility required for acquisitions limits further positive rating actions.
--Fitch believes Oracle currently has the financial flexibility to issue up to $10 billion in incremental debt at the 'A+' rating. Debt issuance in excess of $10 billion or deterioration in financial performance would result in negative rating actions.
--Inability to adapt to major technology transitions, such as SaaS, PaaS or any emerging database technologies.
Fitch believes Oracle's liquidity is strong even after discounting the offshore cash for incremental taxes payable upon repatriation. The significant $35.2 billion of offshore cash reflects a considerable portion of FCF being derived outside the U.S., while significant U.S. funding is required for share repurchases, acquisitions and dividends.
Fitch estimates pro forma leverage (debt/operating EBITDA) of 1.5x as of May 31, 2014 compared with 1.3x, assuming Oracle issues $5 billion of debt to fund the pending acquisition of MICROS.
As of May 31, 2014, total debt was $24.2 billion and consisted primarily of:
--$1.5 billion of 3.75% senior notes due July 2014;
--$2 billion of 5.25% senior notes due January 2016;
--$2.5 billion of 1.20% senior notes due October 2017;
--$2.5 billion of 5.75% senior notes due April 2018;
--$500 million of floating rate senior notes due January 2019;
--$1.5 billion of 2.375% senior notes due January 2019;
--$1.75 billion of 5% senior notes due July 2019;
--$1 billion of 3.875% senior notes due July 2020;
--$1.62 billion of 2.25% senior notes due January 2021;
--$2.5 billion of 2.50% senior notes due October 2022;
--$1 billion of 3.625% senior notes due July 2023;
--$975 million of 3.125% senior notes due July 2025;
--$1.25 billion of 6.50% senior notes due April 2038;
--$1.25 billion of 6.125% senior notes due July 2039;
--$2.23 billion of 5.375% senior notes due July 2040.
Fitch affirms Oracle's ratings as follows:
--Long-term IDR at 'A+';
--Revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
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