OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Oracle Corp. (Oracle) including the Iong-term Issuer Default Rating (IDR) at 'A+'. Fitch has also has assigned an 'A+' rating to Oracle's new senior unsecured notes issuance.

The Rating Outlook is Stable. Prior to the senior notes issuance, Fitch's rating actions affect approximately \$35.3 billion of total debt, including the company's undrawn \$3 billion unsecured revolving credit facility (RCF). A full list of ratings follows at the end of this press release.

The ratings and Outlook reflect Fitch's expectations for solid operating results over the intermediate-term, driven by positive overall top line growth on a constant currency basis, given significant foreign currency headwinds. In particular, Oracle's highly profitable recurring revenues (half of total revenues) from software support and maintenance will drive growth.

Meanwhile, robust software subscription growth, including software as a service (SaaS), platform as a service (PaaS) and cloud infrastructure, should continue to offset declining new software licenses and hardware as the secular transition to the cloud accelerates. Higher levels of maintenance attached to cloud based subscriptions also support expectations for growth.

Fitch expects lower pricing and higher investments associated with cloud-based revenues will pressure profit margins. However, growth of more profitable software maintenance will result in still solid profit margins for the rating. Fitch estimates operating EBITDA margin was 51.5% for the latest 12 months (LTM) ended Feb. 28, 2015 and remain in the mid- to high-40% through the intermediate-term.

Fitch expects more than \$10 billion of annual free cash flow (FCF) through the intermediate-term, a substantial portion of it recurring in nature. Lower deferred revenues associated with the subscription software model and Fitch's expectations for elevated capital spending to support growth in cloud based software and higher dividends may constrain meaningful FCF growth.

Fitch anticipates net proceeds from the senior notes issuance will fund near-term domestic cash uses that will exceed domestic cash flow through 2016, including potentially repaying the \$2 billion of senior notes maturing in January 2016. Oracle had \$11.2 billion remaining available for stock repurchases as of Feb. 28, 2015 and Fitch anticipates net share repurchases will remain consistent with recent years of \$7 billion - \$10 billion.

Fitch expects incremental borrowing to fund domestic cash uses will weaken credit protection measures over the longer-term. Pro forma for the upper end of Oracle's proposed debt issuance and assuming the repayment of \$2 billion of senior notes in January 2016, Fitch estimates gross total leverage (total debt to operating EBITDA) was 2.3x up a full turn from 1.3x for 2014.

Fitch estimates supplemental net adjusted leverage, which incorporates domestic cash and partial credit for nearly \$42 billion of offshore cash, was 1.2x and could rise to 1.5x in the intermediate-term in the absence of meaningful profitability growth. Gross interest coverage (operating EBITDA to gross interest expense) will remain comfortably above 10x through the intermediate-term.

KEY RATING DRIVERS

The Ratings and Outlook reflect:

--Strong financial flexibility, supported cash and investments totaling \$43.8 billion as of Feb. 28, 2015 (\$2.3 billion in the U.S., the remaining held offshore and subject to meaningful tax liabilities upon repatriation), an undrawn \$3 billion RCF due 2018 and Fitch's expectations for more than \$10 billion of annual FCF.

--Strong customer attach-and-renewal rates for software maintenance, resulting in a steadily increasing, highly profitable (90%+ gross margin) recurring revenue stream that meaningfully reduces FCF volatility. Despite Fitch expectations for declining new license revenue, software maintenance revenues (roughly half of total revenues) should continue low- to mid-single digit growth, driven by a higher mix of support for growing cloud software sales.

--Strong competitive position, especially in database and middleware software.

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

Fitch's rating concerns are:

--Competition from open-source software and weight on profitability of Oracle's Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) offerings (cloud subscriptions) relative to traditional on-premise software.

The direct controllable profit on new software licenses and cloud subscriptions continues to trend down, driven by: i) a revenue mix shift toward cloud subscriptions and associated delay in revenue recognition compared with a traditional license; and ii) a decline in the controllable gross margin for cloud subscriptions and incremental expenses to support cloud subscription growth. Fitch believes Oracle has and will continue to make significant investments, both organic and inorganic, to retain its long-term competitiveness relative to other cloud subscription providers.

--Expectations for continued significant shareholder returns, as well as U.S. acquisitions, driving incremental debt issuance, given significant offshore cash and FCF generation that is subject to incremental taxation upon repatriation.

--Aggressive acquisition strategy; however, Fitch expects the company will remain disciplined with its strategy and, in the event of a debt-financed acquisition, will reduce leverage using FCF in lieu of meaningful share repurchases.

RATING SENSITIVITIES

Positive:

Fitch believes the company's lack of a strategic rationale to maintain a higher rating at the expense of financial flexibility required for acquisitions limits further positive rating actions. However, Fitch's expectations for supplemental adjusted leverage sustained below 1x over the longer-term and significant share gains in cloud based software resulting in expectations for FCF of \$15 billion could prompt positive rating actions.

Negative rating actions could occur if:

--Fitch's expectations for gross total leverage or supplemental adjusted net leverage sustained above 3x or 2x, respectively, from incremental borrowings to fund domestic cash shortfalls.

--Fitch expectation of annual FCF sustained near \$5 billion over the long-term due reduced competitiveness as customers shift to the cloud.

Fitch believes Oracle's liquidity is solid, even after discounting the offshore cash for incremental taxes payable upon repatriation. The significant \$41.5 billion of offshore cash reflects a considerable portion of FCF being derived outside the U.S.

As of Feb. 28, 2015, total debt was \$32.3 billion and consisted primarily of:

--\$2 billion of 5.25% senior notes due January 2016;
--\$2.5 billion of 1.20% senior notes due October 2017;
--\$1 billion of floating rate senior notes due July 2017;
--\$2.5 billion of 5.75% senior notes due April 2018;
--\$500 million of floating rate senior notes due January 2019;
--\$1.5 billion of 2.375% senior notes due January 2019;
--\$1.75 billion of 5% senior notes due July 2019;
--\$750 million of floating rate senior notes due October 2019;
--\$2 billion of 2.25% senior notes due October 2019;
--\$1 billion of 3.875% senior notes due July 2020;
--\$1.7 billion of 2.25% senior notes due January 2021;
--\$1.5 billion of 2.8% senior notes due July 2021;
--\$2.5 billion of 2.50% senior notes due October 2022;
--\$1 billion of 3.625% senior notes due July 2023;
--\$2 billion of 3.4% senior notes due July 2024;
--\$1 billion of 3.125% senior notes due July 2025;
--\$1.75 billion of 4.3% senior notes due July 2034;
--\$1.25 billion of 6.50% senior notes due April 2038;
--\$1.25 billion of 6.125% senior notes due July 2039;
--\$2.2 billion of 5.375% senior notes due July 2040;
--\$1 billion of 4.5% senior notes due July 2044.

Fitch affirms Oracle's ratings as follows:

--Long-term IDR at 'A+';
--Revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

KEY ASSUMPTIONS:

--Robust software subscription growth, SaaS, PaaS and cloud infrastructure, should continue to offset declining new software licenses and hardware.
--Recurring maintenance and support revenues are higher for cloud based subscriptions than legacy on-premise software licenses and hardware, supporting overall revenue growth.
--Lower pricing and higher investments associated with cloud-based software will more than offset growth of more profitable software maintenance resulting in operating EBITDA margins in the mid- to high-40% through the intermediate-term.
--Solid profitability and significant recurring revenues will offset lower deferred revenues associated with the subscription software model and Fitch's expectations for elevated capital spending to support growth in cloud based software and higher dividends will result in more than \$10 billion of annual FCF.
--Oracle will use net proceeds from the senior notes issuance to fund \$2 billion of senior notes maturing in January 2016 and complete the company's \$11.2 billion remaining available for stock repurchases by 2017.