OREANDA-NEWS. Fitch Ratings has converted the expected Long-term Issuer Default Rating (IDR) of 'BBB-' and senior secured ratings of 'BBB' for CSRA Inc. (CSRA) to a final rating. The Rating Outlook is Stable.

Fitch's actions follow the completion of CSRA's spin-off from Computer Sciences Corp. (CSC) and affect $3.5 billion of 1st lien secured debt financing, including an undrawn $700 million revolver. A full list of ratings follows at the end of this press release.

The facilities are secured by substantially all tangible and intangible assets of CSRA and the guarantors including 100% of the capital stock of each subsidiary held by the borrower or guarantors.

Concurrent with the separation, CSRA paid a special dividend of $10.50 per share (approximately $1.5 billion) to CSC's shareholders.

In line with Fitch's expectations, CSRA completed the previously announced acquisition of SRA International, Inc. (SRA). CSRA paid total consideration of $1.4 billion, including a $390 million cash payment to SRA's former owners led by Providence Equity Partners, and assumed $1 billion of net debt. The SRA acquisition and the payment of the special dividend were funded with proceeds generated from the secured term loans.

SRA provides increased scale, scope, and a leading position in healthcare. The acquisition also provides complementary capabilities in cloud computing, cyber security, IT infrastructure, mobility, data analytics, and software and systems engineering. SRA will represent approximately 20% of CSRA's pro forma revenue. Targeted net synergies of $50 million should bring SRA's 12% EBITDA margin in line with CSRA's 15% EBITDA margin. Fitch also believes minimal customer overlap provides potential cross-selling opportunities.

Pro forma for the transactions and debt issuance, Fitch estimates total leverage (total debt to operating EBITDA) of 3.5x (3.3x after expected net synergies achievable over the next six to 18 months). Nonetheless, Fitch expects CSRA will use FCF for debt reduction resulting in total leverage below 3x over the next 12 - 18 months. Fitch expects more than $300 million of annual FCF over the intermediate term. Fitch believes CSRA's credit rating has tolerance for the newly announced $400 million of board authorized share repurchases through March 31, 2019.

KEY RATING DRIVERS

Rating strengths include:

--Significant recurring revenue driven by a 90% win-rate on recompetes and nearly 80% of revenue coming from long-term services contracts. CSRA has maintained win rates of nearly 30% on new contract bids while increasing bid volumes 39% in FY 2015 from the previous year. This has been somewhat offset by smaller contracts.

--CSRA's double digit operating income margin is the highest among the top 10 government IT services companies due to scale, a higher mix of fixed price contracts, and cost discipline. Cost control under a fixed price contract allows higher profitability vs. a cost plus contract that requires cost savings be passed to the client. The higher mix of fixed price contracts also increases the downside risk to operating margins, given the inability to pass on higher than expected delivery costs to clients.

--SRA will give CSRA a strong competitive position and top market share in the rapidly growing U.S. government healthcare business (growing 20%).

Rating concerns include:

--Top line risk due to constrained U.S. government budgets and an uncertain political environment. CSRA's fiscal 2014 revenue declined 12% primarily due to government budget cuts under sequestration. Fitch projects CSRA's annual revenue growth will be 2% over the intermediate term, which is roughly in line with the annual increases under sequestration for defense and non-defense discretionary spending. Fitch believes changes related to the sequestration, particularly for defense spending, would likely be to the upside.

--Concentration risk from CSRA's reliance on government contracts. The vast majority of CSRA's business comes from 12 large government agencies, and the top 10 contracts represent nearly 50% of revenue. The lack of diversification is offset by long term contacts (average three to five years) and the stickiness of the IT services CSRA provides, particularly services related to security and intelligence. The SRA acquisition will provide some contract diversification given SRA's largest contract is 3% of revenue and top 10 contracts are less than 20% of SRA's revenue.

--CSRA's deleveraging plan could be derailed by execution missteps given most of the company's FCF will be needed for debt repayment.

KEY ASSUMPTIONS

--Organic revenue growth in the low single digits over the intermediate term, which is roughly in line with the defense and discretionary spending increases scheduled under the sequester.
--Concurrent with the separation from CSC, CSRA will pay a $1.5 billion special dividend to CSC shareholders.
--CSRA will make debt reduction with FCF a priority following the acquisition of SRA.
--100 basis points of margin improvement by FY 2018 from synergies related to the SRA acquisition.
--No significant acquisitions until the company integrates SRA and achieves its total leverage target below 3x.
--Minimal cash balance of $300 million.
--Up to $50 million of annual dividends.

RATING SENSITIVITIES

Negative rating actions could occur if Fitch expects:
--CSRA will sustain total leverage above 3x due to lower than expected revenue growth from weaker than anticipated government spending or intensified contract pricing; or
--Lower than anticipated debt reduction due to structurally weaker than forecast FCF or more aggressive financial polices to fund dividends or share repurchases.

Positive rating actions could occur if Fitch expects:
--CSRA will sustain total leverage near 2x; or
--Post-dividend FCF margin exceeds 10% over a sustained period of time.

LIQUIDITY

CSRA's liquidity position is solid supported by:
--$300 million of cash (all in U.S.);
--$500 million under a $700 million revolver due 2020; and
--$450 million committed A/R facility.

Fitch's expectation for more than $300 million of annual FCF also supports liquidity. CSRA will not be required to make material cash contributions to its pension plans over the intermediate term given the aggregate excess funding balance of $320 million, supporting sufficient FCF for rapid debt reduction over the intermediate term.

CSRA's total debt consists of $3 billion of secured debt including:

--$200 million under a $700 million senior secured revolver due 2020;
--$600 million senior secured term loan A-1 due 2018;
--$1.4 billion senior secured term loan A-2 due 2020;
--$750 million senior secured term loan B due 2022.

Fitch has assigned the following final ratings:

--Long-term IDR 'BBB-';
--Senior secured revolver 'BBB';
--Senior secured debt 'BBB'.