Fitch Rates HT Global USD300m Notes Final 'BB-'

Fitch Ratings-Singapore/Hong Kong-14 July 2016: Fitch Ratings has assigned HT Global IT Solutions Holdings Limited's (HT Global) USD300m 7% senior notes due 2021 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 28 June 2016. The notes are secured by Baring Asia Private Ltd's 100% equity stake in HT Global and the interest reserve account.

The notes are rated in line with HT Global's Long-Term Foreign-Currency Issuer Default Rating. HT Global will use the proceeds from the notes to refinance its existing debt and prefund two years of interest on the notes.

HT Global owns a 71.3% stake in Indian IT service provider, Hexaware Technologies Limited (Hexaware). The notes will be subordinate to any potential debt at Hexaware or other operating subsidiaries. Hexaware and other operating subsidiaries do not currently have any debt and we understand management aims to keep the businesses debt-free. HT Global also has limited capacity to take on additional debt, as there is an incurrence covenant of debt/EBITDA of 3.75x (forecast 2016: 3.5x) in the bond's documents.

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 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 customer base willing to work with the company on a recurring basis.

High Leverage: HT Global's forecasted 2016 FFO-adjusted net leverage of 4.4x is higher than that of most IT peers. 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 mergers and acquisitions. 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 take a dividend holiday to the extent that proceeds from the notes will prefund two years of HT Global's interest payments initially, after which HT Global will need to maintain only one year of interest for the notes.

Low Rating Headroom: Fitch's rating case forecasts FFO-adjusted net leverage falling to 3.1x in 2018 and FFO fixed-charge coverage to 2.3x, compared with levels where Fitch would consider negative rating action of 3.25x and 2.0x, respectively.

Stable Cash Flows: Fitch expects HT Global to generate at least USD85m in annual EBITDA during 2016-2017, supported by 95% of revenue coming from repeat customers. The company has multi-year contracts with most key customers, out of which some have take-or-pay structures. Billing rates have been stable for the last few years.

Strong Revenue Growth: Fitch forecasts 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 infrastructure management and business analytics services. We also forecast operating EBITDAR margin to decline slightly to around 16%-17% (2015: 18%) because a larger share of service revenue is delivered at customers' premises, which is 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. Fitch expects HT Global to generate minimal FCF in 2016 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 as it has sufficient space to accommodate additional employees, except for specific customer requests.

Moderate Customer Concentration: HT Global has moderately higher customer concentration compared to most IT peers. 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 the company's 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 at around 2%-3% starting 2017

- HT Global to maintain a 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 declining below 15% due to a lower employee utilisation rate or losing key customers.

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

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

- improved 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: HT Global's liquidity was adequate at end-2015, with cash and equivalents of USD66m. This comfortably covers short-term debt maturities of USD17m and USD20m in 2016 and 2017, respectively. The company will use proceeds from the USD300m notes to repay all existing debt.