OREANDA-NEWS. Fitch Ratings has assigned long- and short-term Issuer Default Ratings of 'A-/F2' to Hewlett Packard Enterprise Company (HPE) in anticipation of its upcoming separation from HP Inc. on Nov. 1, 2015. Fitch also rates HPE's senior unsecured debt, including the anticipated revolving credit facility (RCF), at 'A-,' and the U.S. and European commercial paper (CP) programs at 'F2'. The Rating Outlook is Stable. Fitch's ratings will affect \\$20 billion of debt, including an anticipated \\$4 billion RCF.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's expectation for improving operating performance from the resumption of top line growth beyond the near term, significant operating profit margin expansion and strong annual free cash flow (FCF; defined by Fitch as after dividends) from restructuring.

Intermediate-term conservative financial policies and solid liquidity should provide HPE with flexibility for smaller intellectual property (IP)-based acquisitions, as the company continues to face headwinds related to the shift to hybrid cloud-based solutions.

Fitch expects organic constant currency revenue trends to begin to stabilize in the near term, driven by strong demand for industry standard servers (ISS) and converged storage. These trends will offset continued weakness in networking and Enterprise Services (ES). Beyond fiscal 2016, Fitch expects new product introductions from increased innovation and go-to-market investments and higher attach rates to drive low-single-digit revenue growth.

Fitch anticipates HP will augment organic growth with acquisitions, likely smaller in size than the company's \\$2.7 billion acquisition of wireless networking company, Aruba Networks, Inc. (Aruba). Given the vast majority of cash is located outside the U.S., Fitch anticipates larger deals will be mostly debt-financed.

Profitability should expand from meaningful restructuring, particularly in ES, and a streamlined indirect channel partner strategy, despite expectations for increased investments to accelerate innovation. Fitch believes cost actions will drive operating EBIT margin to high-single digits from mid-single digits over the intermediate term.

Fitch expects HPE's financial policies will remain conservative, as the company focuses on resuming positive revenue growth. Fitch expects liquidity will be strong, and the company to generate more than \\$1 billion of annual FCF. Fitch anticipates HPE will use FCF for a combination of acquisitions and shareholder returns and that core leverage (excludes debt and operating EBITDA related to the financing activities) to remain below 1.5x while total leverage (total debt-to-operating EBITDA including financing activities) will remain below 2.5x.

The ratings and Outlook reflect:

--Significant diversification of revenues and FCF, a meaningful amount of which is recurring in nature as a result of long-term relationships;
--Conservative financial policies, underpinned by core leverage below 1.5x, although Fitch forecasts core leverage below 1x through at least the intermediate term in the rating case;
--Strong liquidity supported by: i) \\$11.5 billion of cash and investments, the vast majority of which is located overseas but is available in the short term via inter-company loans, ii) a \\$4 billion RCF that will fully backstop commercial paper (CP) programs in the U.S. and Europe, and iii) more than \\$1 billion of annual FCF;
--Significant footprint, share leadership and brand name with a full suite of hardware, software and services offerings and meaningful opportunities to increase penetration at existing customers.

The ratings also consider:

--HPE's need to offset lower secular demand for on-premise proprietary products, which continue to represent a meaningful portion of sales, with strong hybrid cloud-based offerings to resume positive organic revenue growth;
--Potential risks to service levels amidst significant footprint optimization and restructuring in ES, which are critical to the segment achieving industrywide operating profit margins;
--Potential for debt-financed acquisitions to fill hardware and software gaps, given the majority of cash is located overseas.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for HPE include:

--Revenue declines in the mid- to high-single digits for fiscal 2015 and the resumption of organic constant currency revenue growth in the low-single digits beyond the near term;
--Significant restructuring, particularly in the services business, and a richer sales mix offset increased investments to drive operating EBIT margin to the high-single digits from the mid-single digits through the forecast period;
--Cash of \\$11.5 billion and total debt of \\$16 billion at separation, roughly \\$11 billion of which will be attributable to financing activities;
--HPE will use FCF for a combination of acquisitions and shareholder returns.

RATING SENSITIVITIES

The ratings could be downgraded if Fitch expects:

--Sustained negative constant currency revenue growth, indicating a weakness in HPE's product and service offerings despite the company's enhanced focus and increased investments;
--HPE will not achieve and sustain operating EBIT margin approaching 10%, pressuring FCF and potentially resulting in higher shareholder returns and core leverage in excess of 1.5x.

The ratings are unlikely to be upgraded in the absence of Fitch's expectations for:

--Sustained positive revenue growth, supporting the company's strategy, renewed focus and technology leadership;
--Annual FCF to more than double, providing the company with enhanced flexibility for organically funded acquisitions supporting the company's strategy.

LIQUIDITY

Fitch believes HPE's liquidity is strong and supported by:
--\\$11.5 billion of cash and investments, the vast majority of which is located outside the U.S.;
--An undrawn \\$4 billion RCF that fully backstops CP programs in the U.S. and Europe.

More than \\$1 billion of annual FCF also supports liquidity.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Hewlett Packard Enterprise Co.:
--Long-Term IDR of 'A-';
--Short-Term IDR of 'F2';
--CP rating of 'F2;
--Senior unsecured RCF rating at 'A-';
--Senior unsecured debt rating of 'A-'.