Fitch Ratings has revised the Rating Watch for
This action follows recent details NCR has provided on its planned separation into two separate companies. Fitch rates the senior secured revolver and term loans issued by each of the entities 'BB+'/'RR2'. In addition, Fitch rates the senior unsecured bonds and convertible preferred shares issued by
The ratings affect approximately
Key Rating Drivers
Separation into Two Companies: The Rating Watch reflects uncertainty surrounding the projected 2023 separation of the company into two public companies, with NCR planning to spin-off its ATM-related businesses (ATM SpinCo) to shareholders. NCR provided high-level capitalization frameworks for NCR (RemainCo), but the company still has deleveraging targeted over the next year that could impact final capitalization post spin-off. Fitch believes RemainCo will be solidly positioned in many of its end markets, including retail, hospitality and digital banking.
The ATM-related businesses that face long-term secular pressures will be spun-off to shareholders. Fitch expects both companies will generate solid and positive FCF that should enable them each to grow over time. However, the stand-alone cost and FCF generation profile of RemainCo will guide its ability to grow and compete over time.
RemainCo Solid Position, but Less Diversified: RemainCo will include its Retail, Hospitality and Digital Banking segments. Fitch believes NCR holds solid positioning in each of these businesses, particularly in retail where it is a market leader with its self-checkout hardware & software and in restaurants with its Aloha software. RemainCo businesses comprised approximately
Fitch estimates normalized FCF could be below
Leverage Profile: NCR signaled it will generate
Management guided net debt/EBITDA for RemainCo will be in the 3.0x-3.4x range post separation, which Fitch calculates could be mid- to high-3.0x range on a gross debt basis. This level of leverage is manageable for the current 'BB-' IDR, but Fitch is unclear on whether leverage well be sustained at these levels over time and on its future capital allocation policy.
CF Lower Post Separation: NCR's FCF profile will be meaningfully lower post the spin-off of its ATM assets, or potentially less than
NCR generated positive FCF in all except two years from 2007-2021, with 2012-2013 being negatively impacted by approximately
Recurring Revenue: More than 60% of NCR's revenue today is recurring, including products and services under contract where revenue is recognized over time. This recurring mix is materially lower than other companies Fitch rates in the payments and technology industries, at least partially owed to hardware sales, and is a consideration with respect to the IDR. Management seeks to grow this mix over time, which Fitch believes will come via a combination of internal sales initiatives, growth in payment processing (via its December2018
ATM Challenges: Fitch believes ATM sales and network fees could be pressured over the medium/long term as consumer habits shift further away from cash, although increased bank outsourcing could act as an offset. NCR's ATM assets are expected to be spun-off and will no longer be part of RemainCo post completion of the transaction projected by YE 2023. Consumers shifted further away from cash in recent years, particularly in certain markets such as the
Fitch believes demand for cash/ATMs will have a long tail and NCR, as one of the market leaders in both hardware sales and as an independent network operator (via
Competitive End Markets: NCR has meaningful presence in its key end markets, but competition is intense and fragmented in a number of areas. NCR has leading market share in retail point of sale (POS), restaurant software and self-checkout systems and is the #2 vendor in ATM manufacturing with 25%-30% share behind that of
Underfunded Pension: Fitch believes NCR's unfunded pension could be a use of cash in the future. The pension plan is expected to go with the ATMCo spun entity, although it is unclear if there will be a funding requirement pre-separation. Future contributions should be manageable given the company's historic track record of positive FCF generation. NCR's pension obligation was
Derivation Summary
Fitch's ratings and Outlook for NCR are supported by the company's market position across its business, diversification of end markets, history of positive FCF generation, and manageable leverage for the rating category. The Rating Watch reflects potential for the IDR to move lower as NCR will be less diversified and have lower FCF upon separation of its ATM businesses in 2023. NCR does not have any direct comparables that compete across all of its segments given the diverse nature of its end markets, but Fitch assesses the rating relative to other payment and technology companies that provide a range of similar software, hardware and service offerings.
Unlike other companies Fitch rates in the fintech space, NCR's exposure to payments processing is minimal and the company derives most of its revenue and profitability from software, services and hardware. It operates a meaningfully lower margin business than other Fitch-rated fintech peers due to a higher mix of hardware and services. NCR has a stronger operating position than competitor
Key Assumptions
Fitch assumes spin-off of ATMCo occurs at YE 2023;
Organic revenue growth in the low to mid-single digit range in the coming years;
EBITDA margins remain relatively stable, with modest expansion over time, after being negatively impacted in 2022 from supply chain issues and FX;
Capex near 6.5% of revenue for RemainCo;
Excess cash flow used for debt reduction in 2023. Share repurchases resumed in 2023;
Gross leverage decreases from the high-4.0x range at
RATING SENSITIVITIES
Fitch expects to resolve the Rating Watch Negative upon execution of the planned spin-off of NCR's ATM business that is projected to occur by YE 2023. Fitch could stabilize NCR's IDR at the current rating or downgrade, dependent upon Fitch's projection for NCR's stand-alone (RemainCo) capitalization and financial policy.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch-defined gross leverage, or debt/EBITDA, sustained at/below 3.5x;
Revenue expected to grow by low-to-mid-single digit percentage (3%-5%) or higher over multiple years, signaling an improved long-term growth profile;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross leverage sustained at/above 4.0x;
FCF margins expected to be sustained near 1.0% or below, or below historical levels;
Competitive and/or structural changes to industry that pressure revenue, EBITDA and/or FCF.
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
Sufficient Liquidity: NCR's liquidity is stable and should support its operations, growth and M&A strategy in the coming years although it remains unclear what the liquidity profile will look like upon separation in 2023. Liquidity is supported by: (i)
Debt Profile: The majority of NCR's debt is fixed rate, including various senior unsecured notes issuances. Outstanding debt consists of: (i)
The company also has
Issuer Profile
NCR operates as a software, services and hardware enterprise solutions provider, with products targeted at the banking, restaurant and hospitality sectors. Its offerings include digital banking and payment solutions, multivendor connected device services, ATMs, POS terminals and barcode scanners.
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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