Fitch Ratings affirmed the Long-Term Issuer Default Rating (IDR) for Fidelity National Information Services, Inc. (FIS) at 'BBB'.

The Rating Outlook is Stable. The ratings and Outlook impact approximately $19.7 billion of outstanding debt as of 3Q22, not including undrawn capacity on the company's $5.5 billion senior unsecured revolver.

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 December 2022 and activist shareholder involvement in the company. Fitch believes leverage could be near 3.0x or higher in the future. FIS indicated in early 2022 it would ramp capital returns via debt-funded share repurchases but since signaled any meaningful buyback activity would not occur until 2H23, or once there is greater visibility into end market conditions.

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 September 2022, with negative impacts from inflation, downstream supplier pressures and certain slowing end markets (UK). EBITDA and FCF margins remain relatively strong still though in the low-40% and high single-digit percentage range, respectively.

The company plans to cut at least $500 million of costs, which includes layoffs, capex reductions and other items. Fitch expects a similar increased focus on costs/margins in 2023 from several of FIS's peers in the FinTech space.

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 December 2022 on roughly $20 billion of debt, versus 2.8x at December 2018 (prior to Worldpay deal announcement). Fitch estimates FIS could generate $2.0 billion-$3.0 billion of post-dividend FCF annually in 2023-2024, which should support its debt position while also enabling shareholder returns. Fitch also expects FIS will maintain reasonably conservative credit metrics over time given bank regulators review the financial stability of vendors such as FIS that sell products and services into banks.

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 $42 billion and its 2015 acquisition of SunGard for $9.1 billion. The company historically increased leverage for large acquisitions, but it has also shown willingness to use equity for deals as it did with Worldpay, SunGard and Metavante (2009) acquisitions.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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:

$1.9 billion of cash, which includes domestic cash tied to settlements payable deposits in-transit as well as $1.2 billion held by foreign subsidiaries;

A $5.5 billion senior unsecured revolver;

Strong post-dividend FCF generation that was $1.4 billion for the TTM period ended September 2022, $2.6 billion in 2021 and Fitch calculates could be $2.0 billion-$3.0 billion per year in the next few years. FIS has a long history of positive FCF throughout the economic cycle;

A $5.5 billion USD commercial paper program;

A $4.7 billion EUR commercial paper program.

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 $5.5 billion unsecured revolver. Total debt outstanding was $19.7 billion at September 2022, with a weighted average cost of debt of 2% including the impact of interest rate swaps. The company's $5.5 billion USD and $4.7 billion EUR commercial paper (or its equivalent in other currencies) programs and revolver further enhance its ability to cost-efficiently manage working capital and growth needs across multiple points of the economic cycle.

Issuer Profile

Fidelity National Information Services, Inc. (FIS) is a global financial services technology company that provides outsourced banking, payment processing, consulting, and retail and asset management solutions. It was founded in 1968 as Systematics and has grown materially since that time via organic growth and M&A. It serves a diverse mix of 20,000+ banks and financial institutions, more than one million merchants, and other customers in more than 100 countries.

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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