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Investing.com -- Moody’s Ratings has downgraded the corporate family rating (CFR) and senior secured rating of Unisys (NYSE:UIS) Corporation to B2 from B1. The downgrade also applies to Unisys’ $485 million senior secured global notes due in 2027. Despite this, the company’s speculative grade liquidity rating remains at SGL-2. The outlook for Unisys, a global provider of information technology services and software, has been revised to stable from negative.
The downgrade is due to the anticipation of little or no revenue growth and a moderately high debt to EBITDA ratio of around 4.5 times over the coming 12-18 months. Governance risk from financial strategies featuring high financial leverage was a key environmental, social, and governance (ESG) factor in the downgrade. However, the B2 CFR and stable outlook are supported by expectations for gross margin expansion in Unisys’ non-license and support business lines over the next two to three years. As of December 31, 2024, Unisys had a good liquidity profile, featuring $377 million in cash and $117 million available under the unrated $125 million secured credit facility expiring in 2027.
Since 2020, Unisys has removed over $2 billion of pension liabilities. The company may face future cash contributions to its US pension plan, assuming no changes in actuarial assumptions, pension asset performance, or regulatory changes. The company may pursue liability reduction actions, using its cash to make required contributions, thereby reducing its underfunded status. The $776 million underfunded amount of Unisys’ pensions as of December 31, 2024, is considered as debt.
The B2 CFR reflects Unisys’ moderately high debt to EBITDA of 4.8 times as of December 31, 2024, small scale relative to larger competitors, and the challenges of operating within the highly competitive IT services industry. Over 75% of revenue comes from recurring sources, comprised of software license renewals, maintenance and digital workplace services, and outsourcing contracts. EBITDA margin is anticipated to remain about 14% in 2025 and 2026, a decline from about 19% in 2021.
Unisys competes against much larger organizations, including Accenture plc (NYSE:ACN) (Aa3 stable), DXC Technology Company (NYSE:DXC) (Baa2 negative) and Kyndryl Holdings (NYSE:KD), Inc. (Baa2 stable), and non-US and low-cost providers, like Infosys (NSE:INFY) Limited (Baa1 stable) and Tata Consultancy Services (NSE:TCS) Limited (Baa1 stable).
The company’s credit profile benefits from the diverse end markets that it serves, including commercial, financial institutions, and public sector. The stream of high margin, although highly episodic, but generally predictable, software license revenues from its Enterprise Computing Solutions segment significantly improves Unisys’ profit margin and cash flow during periods of increased scheduled software license renewals.
The SGL-2 liquidity rating reflects the anticipation for at least $50 million of free cash flow in 2025. Unisys’ liquidity is also underpinned by its high cash balance and the revolver, which is secured by a priority claim in eligible accounts receivable. The company expects to make approaching $100 million of pension payments in 2025, and more than $100 million in 2026, which are covered by these sources.
The $485.0 million 6.875% senior secured notes due 2027 are rated B2, in line with the B2 CFR. The 2027 Notes are effectively subordinated to the revolver. The current B2 debt instrument rating could be downgraded should Unisys issue a new tranche of senior secured first lien debt.
The stable outlook reflects expectations for little to no revenue growth, some improvement in non-license and support business line gross margins, and good liquidity over the next 12 to 18 months.
The ratings could be upgraded if Unisys achieves organic revenue growth in a low-to-mid single-digit percentage range, sustains debt to EBITDA below 4.0 times and free cash flow to debt around 8%, takes steps required to bring the US and international pension plans to fully-funded status and maintains a conservative financial policy.
The ratings could be downgraded if Unisys revenue declines or if profitability or cash flow generation weakens such that debt to EBITDA will be sustained above 5.5 times or free cash flow to debt will remain below 5% on a more than temporary basis. A diminished liquidity profile or more aggressive financial strategies, featuring large, debt-funded acquisitions or shareholder returns could also lead to lower ratings.
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