Fitch Assigns HT Global First-Time 'BB-' Ratings; Outlook Stable

Fitch Ratings-Singapore/Hong Kong-28 June 2016: Fitch Ratings has assigned HT Global IT Solutions Holdings Ltd (HT Global) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) of 'BB-'. The Outlook is Stable.

The agency also has simultaneously assigned an expected 'BB-(EXP)' rating to the company's proposed US dollar senior secured notes. The notes are secured by Baring Asia Private Ltd's equity stake (100%) in HT Global.

HT Global owns a 71.3% stake in Indian IT service provider Hexaware Technologies Limited (Hexaware).

The final rating on the notes is contingent upon the receipt of final documents conforming to information already received. The notes are rated in line with HT Global's Long-Term Foreign-Currency IDR as they will represent direct, unconditional, secured and unsubordinated obligations of the company. The proceeds from the proposed senior secured notes will be used to refinance HT Global's existing debt and to prefund 24 months of interest on the proposed bond.

The notes will be subordinated to any potential future debt at Hexaware or other operating subsidiaries. Currently, Hexaware and other operating subsidiaries do not have any debt and we understand that management aims to keep these businesses debt-free.

KEY RATING DRIVERS

Mid-Tier IT Services Provider: HT Global's ratings reflect its mid-tier position in the global IT services industry, relatively small scale and modest cost and technology advantage over its peers. However, its ratings are supported by the moderate-to-high costs to its customers to switch to competitors, diversified revenue stream in terms of products and industries served, and its profitable niche with a solid base of customers willing to work with the company on a recurring basis.

High Leverage: Fitch expects HT Global's leverage to be higher than that of most IT peers. Assuming the proposed bond issue goes ahead, its FFO-adjusted net leverage will likely reach 4.4x and 3.5x in 2016 and 2017, respectively. Most Indian IT companies maintain a net cash balance as they require limited capex investments, pay modest dividends to shareholders and have limited appetite for debt-funded M&A. However, HT Global has limited capacity to take on additional debt, given the incurrence covenant of debt/EBITDA of 3.75x (forecast 2016: 3.5x) in the proposed bond's documents.

Our FFO-adjusted net leverage metrics are higher than the net debt/EBITDA ratio. We measure FFO by deducting corporate tax, dividends paid to Hexaware's 29% minority shareholders and dividend distribution tax (at 20.4% on dividends paid) from EBITDA. Hexaware may be able to take a dividend holiday to the extent that the proceeds from the proposed bond are initially used to prefund two years of HT Global's interest payments. After that, HT Global will need to maintain only one year of interest for the proposed bond, anticipated to be funded by future Hexaware dividends.

Low Rating Headroom: For 2018, our rating case forecasts FFO-adjusted net leverage reducing to 3.1x and FFO fixed-charge coverage reducing to 2.3x, compared with the levels at which Fitch would consider negative rating action of 3.25x and 2.0x, respectively.

Stable Cash Flows: We believe that HT Global will generate at least USD85m in annual EBITDA during 2016-17, backed by a high proportion (95%) of revenue from repeat customers. The company has multi-year contracts with most of its key customer, out of which some have take-or-pay structures. Billing rates have been stable for the last few years.

Revenue Growth of 9%-11%: We forecast revenue to rise by 9%-11% a year in 2016 and 2017 due to higher IT spend by existing customers and HT Global's focus on expanding its business targeting the banking & finance and housing & insurance industries, supported by the infrastructure management services (IMS) and business analytics service lines. We also forecast operating EBITDAR margin to decline slightly to around 16%-17% (2015: 18%) because of a larger share in the revenue mix of services delivered at customers' premises, which are more costly, and stable employee utilisation rates of around 70%-7l% (2015: 71%).

Positive FCF Starting 2017: We forecast HT Global to generate positive annual FCF of USD15m-20m from 2017 when capex will normalise to around 2% of revenue. During 2016, we expect HT Global to generate minimal FCF due to high capex of around USD40m to expand facilities at two of its Indian delivery centres. The company is not likely to further expand its delivery facilities given it has sufficient space to accommodate additional employees, except for specific customer request.

Moderate Customer Concentration: Compared to most IT peers, HT Global has moderately higher customer concentration. Its top-10 customers accounted for about 55% of its 2015 revenue, with the top customer making up 10%-15%. However, only four customers account for more than 5% of revenue each. The concentration risk is mitigated by its established long-standing ties with its top-20 customers, which have an average relationship term of 11 years.

KEY ASSUMPTIONS

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

- Revenue growth of 9%-11% over the next two years

- Operating EBITDAR margin to trend down to around 16%-17% over the next two years

- Capex/revenue to remain low around 2%-3% starting 2017

- HT Global to maintain minimum interest coverage of 1.0x.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Worse-than-expected performance or lower equity returns leading to an FFO-adjusted net leverage of over 3.25x on a sustained basis

- Operating EBITDAR margin declines to below 15% due to lower employee utilisation rate or loss of key customers.

- FFO fixed charge cover of below 2.0x on a sustained basis

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

- An improvement in FFO-adjusted net leverage to below 1.5x on a sustained basis.

- Positive FCF margin of over 3% on a sustained basis

LIQUIDITY

Adequate Liquidity: At end-December 2015, HT Global's liquidity was adequate with cash and equivalents of USD66m, which comfortably cover the short-term debt maturities of USD17m and USD20m in 2016 and 2017 respectively. Its liquidity will further improve upon completion of the proposed bond issue, which matures in a single bullet repayment in 2021.