OREANDA-NEWS. March 25, 2016. Fitch Ratings has assigned a 'BBB' rating to Computer Sciences Corp.'s (CSC) \\$525 million unsecured term loan. The Rating Outlook is Stable. A full list of the current ratings follows at the end of this release.

The intended use of proceeds from the new term loan is to partially repay amounts drawn under the Company's revolving credit facilities, to redeem the Company's 6.5% notes due 2018, and for general corporate purpose. The term loan is pari passu with existing unsecured debt. Under the term loan CSC is required to maintain an EBITDA to interest coverage ratio no less than 3x and debt to EBITDA of no more than 3x.

The ratings and Outlook reflect Fitch's belief that the pending acquisitions of Xchanging and UXC for \\$1 billion in aggregate are consistent with CSC's strategy of expanding next-generation offerings to offset declining legacy business.

The ratings incorporate expectations for higher near-term leverage as the company uses cash previously earmarked for debt reduction to fund the acquisitions. Fitch notes the higher leverage reduces tolerance for operational shortfalls. Fitch calculates CSC's post separation debt to EBITDA after synergies, pro forma for the pending acquisitions, is approximately 1.7x as of the LTM period ended Jan. 1, 2016.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's belief that credit protection measures and solid liquidity provides CSC limited capacity at the current rating to complete its business transformation and resume positive revenue growth and strengthen free cash flow (FCF).

In addition, the ratings and Outlook reflect Fitch's expectations that revenues from next generation solutions will begin to offset negative revenue growth for on-premise contracts by FY 2017, given the business' shift in investment focus. Fitch also believes positive near-term operating trends and sustained profitability are key to maintaining the rating.

Fitch expects that CSC shifting its sales mix to more profitable and less capital intensive contracts along with lower costs from substantial restructuring will support FCF generation.

Rating strengths include Fitch's expectations for:

--Strengthening profitability despite near-term top-line headwinds, driven by cost cuts, including CSC's plan to increase its offshore employee mix. Fitch believes the acquisitions will reduce CSC's EBITDA margins before cost synergies are achieved. Fitch expects CSC's operating EBITDA margin will exceed 17% in the intermediate term versus a Fitch estimated 17.7% for the LTM ended Jan. 1, 2016;
--Strengthening FCF profile, driven by Fitch's expectations for an increasing mix of more profitable and less capital intensive contracts. As a result, Fitch expects \\$400 million of pro forma annual FCF and FCF margin exceeding 5% through the intermediate term;
--Substantial customer and industry diversification with high renewal rates associated with long-term service contracts. Fitch believes recurring revenues and FCF will increase upon the resumption of positive revenue growth.

Weaknesses include Fitch's expectations for:

--Continued secular top-line headwinds, as customers shift away from legacy on-premise to cloud-based solutions. Fitch expects negative organic growth will continue through the near term but that a significant shift in investments over the past few years will drive revenue growth from next generation cloud-based solutions beginning in FY 2017;
--Growth areas may be constrained by an industry-wide skilled labor shortage;
--Heightened fixed investment requirements to drive next generation cloud-based solutions, which Fitch believes may reduce competitiveness in bidding new contracts or require significant partnering with direct competitors.

RATING SENSITIVITIES

Fitch believes negative rating action could occur if:
--Debt to EBITDA remains above 2.0x for a sustained period;
--Debt financed acquisitions push debt to EBITDA above 2x without a credible deleveraging plan;
--Fitch expects CSC will not return to positive revenue growth by the end of FY 2017 or positive operating trends in the near term, including operating EBITDA margin erosion, indicating heightened investments in cloud-based solutions are not sufficiently competitive to offset declines in on-premise contracts.

Fitch does not anticipate positive rating actions in the absence of expectations for sustained positive revenue growth and a strengthened FCF profile.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
--CSC maintains debt to EIBTDA below 2.0x;
--Positive organic revenue growth beginning in FY 2017;
--CSC's sales mix shift, cost reductions and strengthened contract discipline will offset EBITDA erosion from revenue declines;
--An increased mix of less capital intensive contracts will drive consistent FCF;
--Shareholder returns will remain modest.

Fitch believes CSC's liquidity was strong as of Jan. 1, 2016 and was supported by:

--\\$1.8 billion of cash (\\$955 million in U.S.);
--\\$2.5 billion of available borrowing capacity under a revolving credit facility (RCF) due 2020;
--\\$200 million of available capacity under a committed leasing facility for capital expenditures on IT equipment and associated software.

Total debt was approximately \\$2.7 billion as of Jan. 1, 2016, primarily consisting of:

--\\$549 Euro-denominated commercial paper;
--\\$298 million note payable due January 2019;
--\\$899 million of 6.50% term notes due March 2018;
--\\$452 million of 4.45% term notes due September 2022.

Fitch currently rates CSC as follows:

Computer Sciences Corp.
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Senior unsecured debt 'BBB';
--RCF 'BBB'.

CSC Capital Funding Limited
--Commercial paper 'F2'.

The Rating Outlook is Stable.