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July 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Rolta Americas LLC's USD300m 8.875% senior unsecured notes due 2019 a final rating of 'BB-'.
The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 15 July 2014. Rolta Americas LLC is a wholly owned subsidiary of Rolta India Limited (Rolta; BB-/Stable), a company with interests in information technology (IT) and geospatial services.
The notes are unconditionally and irrevocably guaranteed by Rolta, and are therefore rated at the same level as Rolta's foreign-currency senior unsecured rating of 'BB-'. The company will use about 75% of the proceeds of the notes to refinance its existing secured debt and the balance for general corporate purposes. The notes rank pari passu with the issuer's existing and future senior unsecured indebtedness. Rolta has changed its financial year-end from June 30 to March 31. The ratings factor in its financial results for the nine months ended March 2014 and our expectations for future performance.
USD300m bond's terms and conditions are similar to Rolta LLC's USD200m 10.75% guaranteed senior notes due 2018, except that in the USD300m notes the interest reserve account is not required, the fixed charge coverage ratio is lowered to 2.5x from 3.0x, and Rolta's guarantee on the notes is reduced to 1.5x the bond issuance amount from 2.0x.
These changes provide weaker comfort for bondholders in a stressed scenario. However, in light of the company's current profitability levels, ability to generate positive free cash flow (FCF), and rating level of 'BB-', these changes do not affect the ratings.
KEY RATING DRIVERS
Low Ratings Headroom: Rolta's funds flow from operations (FFO)-adjusted leverage of 3.7x at end-March 2014 (FY13:4.1x) is close to the 4.0x threshold above which Fitch may consider a negative rating action. We expect its leverage to remain stable at around 3.5x during FY15-16 as a decline in capex/revenue to 12%-13% (9MFY14: 29%) would offset a likely deterioration in operating EBITDAR margin to 33%-35% (FY14: 37.3%) resulting in FCF margin of 5%-6% (9MFY14: -9%).
Likely Lower Profitability: Rolta is gradually shifting its business from a high-margin but capital-intensive model to a lower-margin, lower-capex model. Fitch expects annual capex to decrease to around INR3.5bn-4bn during FY15-16 in line with the company's plan to generate new products, the development costs of which would be expensed rather than capitalised. Management expects annual capex to fall to INR2bn during the same period. Rolta invested about INR45bn, or 56% of its revenue, during FY11-14 mostly to acquire intellectual property, intangible assets and to develop demonstrations and prototypes.