Fitch Ratings affirmed the Long-Term Issuer Default Rating (IDR) for
The Rating Outlook is Stable. The ratings and Outlook impact approximately
The FinTech industry slowed meaningfully in 2H22 but FIS remains well positioned from a balance sheet and cash flow perspective. The recently announced strategic review, however, is a factor that could impact the IDR if there are material changes made to the company's financial and capital allocation policies.
Key Rating Drivers
Near-Term Pressures: FIS faces near-term headwinds from slowing macro conditions but is taking certain actions to reduce costs in the coming year. Fitch believes these challenges will impact growth and margins in 2023, but the company is fairly well positioned from a balance sheet perspective. Fitch also believes the company will continue to generate robust FCFs in 2023-2024 despite potentially weaker fundamentals. Organic revenue growth slowed during 2022 and was up mid-single digit in 3Q22 versus high-single digits entering the year, and growth could slow further in the near-term. Management targeted cost savings of $500m+, which Fitch calculates is 3%-4% of its combined cost base including capex.
Shareholder Capital Returns: Fitch views the company's capital allocation policy as evolving given a strategic review announced in
This strategy could change given recent activist shareholder involvement. Fitch expects the company will prioritize the uses of FCF over time for M&A, buybacks and dividends. FIS is solidly positioned at its current IDR, but a more aggressive capital allocation policy may increase the company's default risk over time.
Profitability in Focus: Fitch expects more focus on costs and margin improvement in 2023, with slowing in some areas of its business and further risks of consumer and/or macro softening. FIS experienced approximately 80 basis points of margin pressure for the YTD period through
The company plans to cut at least
Commitment to Investment Grade Ratings: Fitch believes FIS is committed to IG ratings at least at the 'BBB' level and targets gross leverage near 3.0x, but this could evolve given recent shareholder activism. Fitch calculates gross leverage will be near 3.0x at
Stable Business Model: Despite near-term macro concerns, Fitch views FIS's business as reasonably stable through the cycle. Its technology solutions are mission-critical for its customers, as evidenced by its market presence, long-term contracts and high renewal rates. Customer engagements are typically secured by long-term contracts (five years on certain core products) and high renewal rates (>90%). The Merchant Solutions business has more cyclicality but is still relatively stable. FIS has meaningful visibility into future revenue and cash flow, which is evidenced by consistent organic revenue growth at least in the low-single digit range over the past decade. Results during 2020 further reflect this stability with an organic revenue decline of only 1% despite the pandemic.
Outsourcing Trends: FIS benefits from outsourcing trends that Fitch believes will continue in the coming years. Banks and other financial institutions rely on third party technology suppliers to focus on core competencies, streamline processes, and reduce costs. Regional banks are facing the most pressure to outsource as they try to keep pace with the technology investments of the big banks and are falling behind community banks that have already made the decision to outsource. Fitch also believes FIS's complete portfolio is a competitive advantage as customers consolidate vendors.
Growth via Acquisitions: Fitch expects FIS will continue to pursue inorganic growth via acquisitions over time and divestitures or other business mix changes, particularly given the ongoing strategic review. FIS completed multiple deals of scale historically, including its 2019 purchase of Worldpay for
Derivation Summary
Fitch's ratings and Outlook for FIS are supported by the company's high mix of recurring revenue, sticky customer base, market leadership in its core businesses, and predictable cash flow generation. Rating constraints include highly competitive end markets and acquisition risk surrounding large-scale M&A.
FIS was historically successful at driving synergies with large deals, including Worldpay and SunGard. Nonetheless, future M&A bears various risks (e.g., integration, customer losses, financing) that could impact ratings over time. Inclusive of these risks, Fitch believes the company's operating fundamentals including stable/growing EBITDA & margins, low leverage, and strong FCF generation position FIS well within the 'BBB' rating category.
Key Assumptions
Revenue increases in the low-single digit range in 2023 due to weaker macro conditions, with mid-single-digit growth projected beyond this year.
EBITDA margins stable in 2023 with cost savings helping to offset weaker revenue trends. Margins are forecasted to show modest expansion over balance of forecast horizon.
Capex declines modestly in 2023-2024 due to targeted cost savings but remains near 8%-9% of revenue, or similar to recent years.
Buybacks remain a primary use of cash flows absent any additional M&A.
Dividends grow mid-teens per year.
Gross debt/EBITDA increases to the low-3.0x range in the future.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--(CFO-capex)/debt sustained above 12%;
EBITDA leverage, defined as debt/EBITDA, expected to be sustained below 3.0x;
Organic revenue growth at least in the mid/high-single-digit percentage range, signaling improving core trends.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage above 3.5x for a sustained period without a credible de-leveraging plan;
--(CFO-capex)/debt sustained below 9%-10%;
Post-dividend FCF margins that trend toward mid-single digit as a percentage of revenue;
Significant changes to the structure of the fintech sector or disruption from emerging technologies.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: FIS has very strong liquidity that benefits its overall IDR. The company has the following sources of liquidity as of 3Q22:
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Strong post-dividend FCF generation that was
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Debt Profile with Staggered Maturities, Diverse Funding Sources: FIS is a seasoned investment grade issuer with a staggered debt maturity schedule, consisting largely of unsecured bonds (across multiple currencies including USD, EUR and GBP) with maturities ranging from 2023-2052 and a
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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