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Fitch Rates Oracle's Debt Offering 'A'; Outlook Positive

^{Published on 2010-07-12 10:05:24 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has assigned an 'A' rating to Oracle Corporation's (Nasdaq:ORCL) (Oracle) proposed $3.25 billion offering of 10- and 30-year senior unsecured notes. Proceeds from the offering will primarily be utilized to refinance existing debt, consisting of nearly $1 billion of commercial paper (CP) previously issued in conjunction with the maturity of $1 billion of floating-rate notes in May 2010 and pre-fund $2.25 billion of 5% senior unsecured notes due in January 2011. The Rating Outlook is Positive.

Fitch currently rates Oracle as follows:

-- Long-term Issuer Default Rating (IDR) 'A';

-- Revolving credit facility (RCF) 'A';

-- Senior unsecured debt 'A';

-- Short-term IDR 'F1';

-- Commercial paper (CP) 'F1'.

The ratings and Outlook reflect Oracle's:

-- Ample liquidity, supported by consistent and increasing annual free cash flow (FCF) in excess of $7 billion since fiscal year (FY) 2008 (ended May 31), significant cash and short-term investments totaling $18.5 billion as of May 31, 2010 and an undrawn $3 billion RCF due in March 2011. Fitch projects FCF of approximately $8.6 billion in FY 2011 (May 31) compared with nearly $7.5 billion in FY 2010, which was in-line with Fitch's expectations. The increase in FY 2011 primarily reflects a full year of financial results for Sun Microsystems (Sun), which Oracle acquired on Jan. 26, 2010, expected profitability improvements for Sun's hardware business due to cost synergies and focus on profitable revenue growth, and strengthening demand for new software licenses and related software license updates and support (i.e. maintenance), assuming the gradual economic recovery proves sustainable.

-- Strong customer attach and renewal rates for software maintenance despite the severity of the economic downturn, resulting in a steadily increasing, high-margin recurring revenue stream that significantly reduces free cash flow volatility. The gross margin for the license updates and support segment steadily increased to 90.9% in FY 2010 from 87.9% in FY 2004, reflecting benefits of scale achieved through multiple acquisitions and solid cost management.

-- Strong competitive position, especially in database and middleware software, and complete ownership of the systems stack, which offers opportunities to differentiate and strengthen the hardware business.

-- Size and diversity with respect to its installed software base and significant switching costs associated with mission-critical enterprise software.

-- Solid credit protection measures. Fitch estimates leverage (total debt to operating EBITDA) will decline to 1 times (x) by year-end FY 2011 compared with 1.2x for FY 2010, while interest coverage improves to nearly 20x from approximately 16x in the same period.

-- Established track record of integrating large software acquisitions.

Rating concerns center on Oracle's:

-- Ability to successfully integrate Sun, which is the company's first non-software acquisition and largest integration effort to date in terms of revenue, employees and customers acquired.

-- Aggressive acquisition strategy, including a broader list of potential targets outside of the software industry following the Sun acquisition. However, in the event of a sizeable acquisition, Fitch expects the company to refrain from meaningful share repurchases and utilize free cash flow to reduce debt incurred in an acquisition.

-- Limited growth prospects in the high-end enterprise server market, a core market for Sun, due to the ongoing shift to low cost industry standard servers, Sun's declining market share, primarily to IBM (rated 'A+' with a Stable Outlook by Fitch), and indeterminate market demand for appliance servers.

-- Adaptability and long-term profitability of Oracle's enterprise applications business as demand accelerates for software as a service (SaaS) in lieu of traditional software installations.

The ratings may be upgraded in the event of:

-- A successful integration of Sun with minimal disruption to the software business.

The ratings may be downgraded in the event of:

-- A shift to more aggressive financial policies;

-- Significant integration difficulties relating to Sun.

Fitch believes Oracle's liquidity remains strong, despite the company's non-renewal of a $2 billion 364-day RCF in March 2010 and declaration of an initial quarterly dividend of $0.05/share or approximately $1 billion annually. Despite the non-renewal of the 364-day RCF, Oracle reduced the size of its CP program by a corresponding amount in order to maintain a 100% backstop. Fitch notes the vast majority of Oracle's cash is held offshore since a considerable portion of FCF is derived outside the U.S., while significant funding requirements for share repurchases, acquisitions and dividends are in the U.S. Oracle's $3 billion RCF includes only one financial covenant, consisting of a maximum net debt to total capitalization of 45%.

As of May 31, 2010, total debt was approximately $14.7 billion and consisted primarily of:

-- $2.2 billion of 5% senior notes due Jan. 2011;

-- $1.25 billion of 4.95% senior notes due April 2013;

-- $1.5 billion of 3.75% senior notes due July 2014;

-- $2 billion of 5.25% senior notes due Jan. 2016;

-- $2.5 billion of 5.75% senior notes due April 2018;

-- $1.75 billion of 5% senior notes due July 2019;

-- $1.25 billion of 6.125% senior notes due July 2039;

-- $1.2 billion of 6.5% senior notes due April 2038;

-- $881 million of CP.

Applicable criteria are available at '[ www.fitchratings.com ]' and specifically include the following reports:

-- 'Corporate Rating Methodology', dated Nov. 24, 2009;

-- 'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', dated Nov. 24, 2009;

-- 'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

-- 'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', dated June 19, 2007.

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

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