Fitch: CA Inc.'s 'BBB+' IDR and Stable Rating Outlook Unaffected by Dividend Increase

CHICAGO--(BUSINESS WIRE)--

Fitch stated today that the following ratings and Stable Rating Outlook for CA, Inc. CA are unaffected by the company's announced share repurchase program and increased cash dividend:

--Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured revolving credit facility (RCF) 'BBB+';

--Senior unsecured notes 'BBB+'.

The stock buyback program authorizes the repurchase up to $1.5 billion of common stock through March 31, 2013 and provides for a $500 million accelerated share repurchase (ASR) program to be completed during the current quarter ending March 31, 2012. The dividend increase raises the quarterly cash dividend to $0.25 per share (approximately $500 million annually) from $0.05 per share (approximately $91 million for the latest 12 months ending Dec. 30, 2011).

CA's consistent free cash flow, solid liquidity and low debt levels historically have provided the company with meaningful financial flexibility within the 'BBB+' rating. Furthermore, the ratings and Outlook always have incorporated CA's use of free cash flow for share repurchases and acquisitions. These cash uses have been smaller in size and less frequent than anticipated and resulted in cash build over recent years and more than sufficient capacity for the share repurchase authorization.

Nonetheless, Fitch believes the significantly higher cash dividend reduces structural financial flexibility, resulting in a weaker 'BBB+' rating for CA. Fitch estimates the dividend will represent approximately 42% of expected pre-dividend free cash flow for the fiscal year ending March 31, 2012, which is meaningfully higher than that of software or technology peers.

Fitch estimates CA's current U.S. cash and cash equivalents balances totaled approximately $1 billion as of Dec. 31, 2011 with approximately half of free cash flow generated domestically. Fitch expects total pre-dividend annual free cash flow of more than $1 billion in each of fiscal years 2012-2014.

As contingency sources of liquidity, the company has substantial pooled foreign cash balances that could be repatriated at relatively favorable tax rates. CA also has headroom under current covenants related to the undrawn $1 billion revolving bank credit facility. However, Fitch believes the increased dividend reduces the incremental debt available at the 'BBB+' rating and Stable Outlook, which now incorporate Fitch's expectation that total leverage will remain under 1.5x. Fitch estimates total leverage (total debt to operating EBITDA) was 1 times (x) for the LTM ended Dec. 31, 2011.

Leverage tolerance also factors in significant deferred revenue balances and Fitch's expectations that the ratio of cash balances and accounts receivables to deferred revenue (including long-term) and other short term liabilities will not diverge too dramatically from historical levels. The use of a portion of existing cash balances are accommodated at existing ratings given the company's substantial billings backlog as well as Fitch's belief that deferred revenue balances carry high incremental operating margins. Importantly, Fitch does not anticipate a material reduction in orders over time, given significant switching costs associated with the software industry.

The rating and Outlook reflect Fitch's expectations that CA's:

--Revenues will grow at a modestly positive rate;

--Annual free cash flow will exceed $500 million; and

--Financial policies beyond today's announcement will remain relatively conservative; and

--Credit protection measures will remain solid.

Revenues are on track for growth in the mid-single digits for fiscal year 2012, driven by improved enterprise spending and increased focus on smaller customers through its indirect sales network. Sales growth within mainframe markets should remain modest but drive substantial recurring revenues and free cash flow, given the company's exposure and leadership positions in these markets. CA's longer-term sales should increasingly be dependent upon the rate of cloud computing adoption, which could meaningfully expand the addressable market for CA's security and compliance products.

Fitch anticipates profitability will remain near current levels, with operating EBIT margins in the mid-30%. Fitch believes the potential for pricing pressures should be at least partially offset by the company's ongoing efforts to realign the organization (redundant costs associated with past acquisitions) and implementation of CA's enterprise resource planning system. As a result, Fitch believes CA's annual free cash flow will exceed $500 million within a normalized operating environment.

Fitch believes positive rating actions are unlikely without significant revenue growth outside mainframe markets, supporting the company's virtualization and cloud computing strategy and ability to remain competitive despite its more limited investment levels.

The ratings could be negatively impacted by:

--Total leverage exceeds 1.5x;

--Sustained revenue contraction, most likely from larger customer consolidation;

--Intensified pricing pressures resulting in meaningful profit margin contraction, or;

--A lack of success penetrating or slower adoption of virtualization.

The ratings continue to be supported by:

--Strong share positions in and high switching costs associated with core mainframe and security markets, which constitute the majority of CA's revenue mix and drive significant recurring maintenance revenue;

--Annual free cash flow of more than $500 million, largely from the diversification of CA's customer base; and

--Conservative financial policies, supported by historical debt reduction over last few years and nearly 1x net cash position, pro forma for 60% of cash located outside of the U.S. as of Dec. 31, 2011.

Ratings concerns center on:

--Mature organic growth rates within mainframe market, which continue to constitute a significant proportion (albeit highly profitable) of total revenues;

--Challenges integrating historical acquisitions, which Fitch believes will be critical to maintaining operating margins at current levels over the longer term;

--Expectations for substantial acquisitions activity in order to bolster revenue growth within cloud computing and virtualization markets; and

--Meaningfully larger competitors with superior financial flexibility.

Fitch believes CA's liquidity at Dec. 31, 2011 was solid and supported by:

--$2.5 billion of cash, approximately 60% of which was located outside the U.S. CA's deferred revenues were approximately $3.6 billion; and

--an undrawn $1 billion RCF expiring August 2016.

Fitch's expectations for more than $500 million of annual free cash flow also support CA's liquidity, although approximately half of this FCF is generated outside the U.S.

Total debt was approximately $1.3 billion as of Dec. 31, 2011 and consisted of:

--$750 million of 5.375% senior notes due 2019;

--$500 million of 6.125% senior notes due 2014; and

--$35 million of capital leases.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Evaluating Corporate Governance', December 12, 2007.

--'Liquidity considerations for corporate issuers', June 12, 2007.

--'Cash flow measures in corporate analysis - amended', October 12, 2005

--'Revisions to Rating Definitions', March 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

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

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Cash Flow Measures in Corporate Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=243758

Fitch Revisions to Rating Definitions: Sovereign Implications

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=432326

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