Fitch Affirms Convergys' IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the ratings of Convergys Corporation (Convergys) as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Revolving credit facility (RCF) at 'BBB-';

--Senior unsecured debt at 'BBB-';

--Short-term IDR at 'F3';

--Commercial paper (CP) at 'F3'.

The Rating Outlook is Stable.

Approximately $425 million of debt is affected by Fitch's action, including Convergys' undrawn $300 million credit facility.

Convergys' ratings and Stable Outlook reflect:

--Solid liquidity and financial flexibility provided by a net cash position ($277 million), undrawn revolving credit ($300 million) and accounts receivable (A/R) securitization facilities ($150 million), consistent free cash flow (FCF) and no significant debt maturities until 2029 ($125 million).

--Improving financial performance of Customer Management (CM) and stabilization in Information Management (IM).

--Significant recurring revenue base primarily from long-term CM contracts (2-3 years) partially offset by fluctuations in call volumes with existing clients.

--Long-term customer relationships and high switching costs for existing CM clients to in-source the process.

--Solid credit metrics with total leverage (total debt/operating EBITDA) below 1 times (x) and interest coverage (operating EBITDA/interest expense) exceeding 15x in the latest 12 months (LTM) ended Sept. 30, 2011.

Fitch believes leverage will remain below 1x through at least 2013 based on the company's solid liquidity position and consistent FCF, which should provide adequate internal funding for acquisitions and/or share repurchases.

Credit concerns center on:

--The lack of revenue diversification as Convergys' customer base is highly concentrated by customer and industry. The three largest customers, AT&T (CM & IM), DirecTV (CM) and Comcast (CM), and the communications industry represented 37.6% and 64.7% of total revenue, respectively, in 2010.

--The greater volatility of IM's financial results, reflecting a significant decline in data processing revenue subsequent to the North American client migrations that largely concluded in 2010.

--The sustainability of the recovery in call volumes given the uncertain macroeconomic environment.

--The substantial and increasing currency market risk exposure as a greater portion of CM services delivery costs are incurred offshore, primarily in the Philippines and India, for contracts denominated in U.S. dollars. This risk is mitigated by currency hedges, primarily through the use forward contracts.

The ratings may be upgraded in the event of:

--Fitch believes the rating is likely capped at 'BBB-' in the absence of further customer and industry diversification.

The ratings may be downgraded in the event of:

--The loss of any key customer(s), including AT&T, DirecTV and/or Comcast Corporation.

--Significant debt-financed acquisitions and/or share repurchases.

--Spin-off of IM, depending on the financial outlook for the remaining CM business.

Convergys' solid financial flexibility is supported by $473 million of cash as of Sept. 30, 2011 (66% located in U.S.), an undrawn $300 million RCF and $150 million A/R securitization facility expiring 2015 and 2014, respectively. The company also generates consistent FCF before cellular dividends. FCF was $97.5 million in 2010 and Fitch forecasts approximately $125 million for 2011 and $140 million - $150 million in 2012.

Financial covenants in the credit agreement include a minimum interest coverage ratio of 4x on a trailing 12 months basis and maximum leverage of 3x until Dec. 31, 2012 and 2.75x thereafter. The company has ample cushion with respect to the both financial covenants given total leverage of 0.7x and interest coverage of 15.7x based on Fitch's estimates.

On July 1, 2011, Convergys completed the sale of its cellular partnership interests to AT&T for $320 million on a pre-tax basis. As a result, the company no longer receives distributions from the partnerships, which averaged $38.3 million annually since 2008. Fitch consistently excluded these distributions from operating profit and FCF since the investments were deemed non-core. Therefore, the sale has no effect on the company's credit metrics.

As of Sept. 30, 2011, total debt was $195 million, primarily consisting of:

--$125 million of 5.75% junior subordinated convertible debentures due 2029; and

--$59 million of capital lease obligations.

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' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

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

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