S&P Global Ratings placed Micro Focus International PLC's issue ratings on CreditWatch with negative implications, while Moody's revised the ratings outlook on Micro Focus to negative, after the British software maker announced the departure of its CEO and that its annual revenue will decline more than previously estimated.
S&P Global Ratings placed the BB- long-term issuer credit rating and issue ratings on CreditWatch with negative implications, saying the expected bigger revenue decline could lead to higher leverage and weaker, though generally strong, free operating cash flows.
S&P Global Ratings expects to resolve the CreditWatch status within a month after reviewing the technology firm's mid-term revenue prospects, cost-saving plans, associated restructuring costs and free cash flow generation projections.
Micro Focus said March 19 that its revenue was expected to fall between 6% and 9% over the 12 months ending Oct. 31, compared to a previous forecast of a 2% to 4% drop, citing lower license income and "one-off transitional effects" of its $8.8 billion acquisition of Hewlett Packard Enterprise Co.'s software business in September 2017.
The company also said CEO Chris Hsu is resigning immediately to pursue another opportunity.
"We view negatively the unexpected resignation of the group's CEO after six months at the combined group and about a year as head of HPE's Software division beforehand," S&P said. "We believe this could possibly cause a further distraction during this critical phase of the integration process."
Meanwhile, Moody's revised the ratings outlook on Micro Focus from stable, citing increased execution risks and uncertainty regarding revenue and EBITDA growth for 2018 and beyond.
The rating agency said revenue performance will remain more volatile during the integration of the HPE software business in 2018.
Moody's warned that a prolonged decline in revenue, EBITDA or cash flow could result in a downgrade and that any larger or debt-funded acquisitions during the HPE integration could also put negative pressure on the ratings.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.