Information technology (IT) is one of the most consistently watched industries in the U.S., and the companies in it can be subject to swift changes in fortune because of technological changes, shifts in consumer or business preferences, mergers and acquisitions, or simply poor performance. We have identified 12 rated U.S. technology companies whose outlooks are not stable.

Our mix of these non-stable outlooks leans to the positive because eight of the 12 companies have positive outlooks or ratings that are on CreditWatch with positive implications (see chart). A positive (or negative) outlook represents an at least one-third chance of a rating change over the next 12 months (following a rating action) for speculative-grade issuers, or the next 24 months for investment-grade issuers. A CreditWatch placement represents an at least 50% chance of a rating change (either higher or lower) over the following 90 days and is usually related to some event. However, these timeframes are just guidelines. We endeavor to resolve these outlooks as soon as we receive the information necessary to do so.

Strong Macro Recovery In 2021 Improved Technology Issuers' Creditworthiness Across The Board

Macro recovery throughout 2021 improved creditworthiness across all sub-sectors of our technology coverage universe. Credit market access also continues to improve across the board, even for early stage companies. While the industry continues to work through supply constraints and low inventory (especially within the semiconductor, hardware, and optical networking sub-sectors) and inflation (along with associated actions from the Federal Reserve) are risks, we see 2022 to be a year of continued improvement. For a detailed perspective on drivers of ratings within the technology industry as well as key risks, please see "Industry Top Trends 2022: Technology," published Jan. 25, 2022. For an additional perspective, please see our recent commentary titled "Strong Fundamentals In U.S. Tech Allow Capital Allocation Flexibility," published Jan. 19, 2022.

U.S. Technology Companies On CreditWatch

Table 1

• On Oct 28, 2020, S&P Global Ratings placed all its ratings on Advanced Micro Devices Inc. on CreditWatch with positive implications following the acquisition announcement of Xilinx. We expect to resolve the CreditWatch on close of the transaction, after determining the extent of Xilinx's contribution of improved product and end-market diversity, as well as more complete data center offerings to AMD's portfolio. Upon completion of this evaluation, we would likely upgrade AMD by two notches to 'BBB+'.
• On Oct 4, 2021, we placed all ratings on Brooks Automation on CreditWatch with developing implications based on a definitive agreement to sell its Semiconductor Solutions Group business for $3 billion in cash. We expect the deal to close in the first half of the calendar year of 2022, at which point we will resolve the CreditWatch placement after reviewing the prospective company's capital structure, financial policy, business strategy, and outlook.
• On Feb. 1, 2022, we placed all our ratings on Citrix Systems Inc. on CreditWatch with negative implications. This was driven by Citrix's announcement that it has entered into a definitive agreement to be acquired by affiliates of Elliott Investment Management and Vista Equity Partners through an all-cash transaction valued at $16.5 billion. We expect to resolve the CreditWatch placement after we gain a better understanding of its business strategies and integration plans, capital structure, credit protection measures, and financial policy.
• On March 25, 2021, we placed our 'B' issuer credit rating and issue-level ratings for Intermedia Holdings Inc. on CreditWatch with positive implications due to plans to repay about $125 million of its outstanding term loan using net proceeds from its planned IPO. We believe this proposed debt reduction and introduction of a public shareholder base could lead to leverage staying below 5x on a sustained basis, which we consider in line with a higher rating. We intend to resolve the CreditWatch placement on completion of the IPO.
• On April 12, 2021, we placed our ratings on Nuance Communications Inc. on CreditWatch with positive implications. The CreditWatch placement reflects the strong likelihood that we will upgrade or discontinue our ratings on the company after the close of its acquisition by higher-rated Microsoft Corp. Upon closing, Microsoft expects to report Nuance's financial results as part of its Intelligent Cloud segment. The transaction has been approved by the board of directors of each company but is subject to customary closing conditions, including the approval of Nuance's shareholders and the regulators.
• On Dec. 20, 2021, we placed our ratings on Oracle Corp. on CreditWatch with negative implications because it has announced it reached an agreement to acquire Cerner Corp. at an enterprise value of about $30 billion. We will monitor developments related to the proposed acquisition and resolve the CreditWatch placement after we have a better understanding of Oracle's balance sheet management plan. We expect this to happen no later than the time of new debt issuance to fund the transaction.

U.S. Hardware And Semiconductor Companies

Table 2

• On April 19, 2021, we assigned a 'B-' rating to Atlas Midco Inc. with positive outlook. This reflects our expectation that the company will maintain pro forma revenue growth in the low-single-digit percent area and EBITDA margins in the low-30% area helped by previous restructuring actions and a recent return to growth at Aspect. Assuming a successful integration, we believe leverage could fall below 6.5x and FOCF to debt would likely remain above 5% within the next 12 months as cost synergies are realized. We could raise our rating if pro forma revenue growth were sustained, EBITDA margins were sustained well above 30%, or leverage stayed below 6.5x.
• On May 27, 2021, we affirmed our ratings on Diebold Nixdorf and revised the outlook to positive. The positive outlook reflects our view that the benefits from management's expense-reduction efforts and the moderating level of restructuring costs related to its DN Now business improvement plan will support an expansion in its EBITDA and an improvement in its leverage to the high-5x area by the end of 2021. Our outlook also incorporates management's improved financial outlook and our expectation for a recovery in its end markets. We could raise our rating on Diebold Nixdorf if it achieved and sustained cost savings and operational improvements such that its leverage declined below 6.5x and its FOCF to debt improved above 5% on a sustained basis.
• On Oct 18, 2021, we revised our rating outlook on Micron Technology Inc. to positive. The positive outlook reflects our view that the memory market will remain favorable over the near term given the strong demand from most end markets and disciplined industry capital spending. This should enable Micron to generate strong FOCF near term and a net cash position. We could raise the rating if Micron continued to improve operating performance and cash flow generation, maintained or expanded its share in the memory market, and adhered to maintaining leverage below 0.5x through industry cycles and acquisitions.

U.S. Software And IT Services Providers

Table 3

• On July 27, 2021, we affirmed our 'B' rating on Magenta Buyer LLC, with a negative. The negative outlook reflects Magenta Buyer's high S&P Global Ratings-adjusted leverage of about 9x at deal close. While the company has well-laid-out plans to lower costs and improve profitability, these plans could be disruptive over the near term and may keep leverage above the mid-7x area in the 12 months after the deal closes. We could lower the rating if Magenta Buyer failed to execute the cost savings plan, which would result in leverage rising beyond the mid-7x area, or if FCF to debt fell to 2%.
• On June 22, 2021, we assigned a 'B-' issuer credit rating to Skillsoft Corp., with a positive outlook. The positive outlook reflects our view that business stabilization and lower one-time costs will support deleveraging below 5x over the next 12 months under our base case. The outlook also reflects the potential for growth in bookings, as well as its sustainability, leading to revenue growth in the near term. We expect Skillsoft to maintain positive free operating cash flow (FOCF) to debt in the mid- to high-single-digit percentage area. We do not expect the SPAC warrants to result in a cash outflow for the company. We could raise the rating if business improvements consistently supported leverage under 5x and FOCF to debt above 10%.
• On Aug. 12, 2021, we revised our outlook on Severin Holdings Inc. to positive. The positive outlook reflects our expectation that the company will continue to benefit from favorable industry trends as more K-12 schools embrace digital transformation initiatives, as well as expecting the company to maintain its leading market position within its space. We expect organic revenue growth to be in the 8%-12% range over the next few years, with S&P Global Ratings-adjusted EBITDA margins fairly consistent in the low- to mid-20% area. We expect FCF to debt to improve to high-single-digit percentages in 2022 due to lower interest expense and a drop-off in IPO deal payments.

Closing Thoughts

The number of issuers with non-stable outlooks has decreased significantly from a year ago and the bias has changed to positive from negative, reflecting a combination of a strong operating environment in the software and semiconductor sub-sectors and improving debt pricing. The change in bias to positive and the technology sector's improved credit profile are also reflected in the many upgrades in fiscal 2021.

During 2022, we expect the IT spending environment to remain favorable, above global GDP growth rates. Nonetheless, we expect upgrade activity this year to be lower than in 2021 because we've incorporated the favorable conditions into our forecasts.

Related Research

• Industry Top Trends 2022: Technology, Jan. 25, 2022
• Strong Fundamentals In U.S. Tech Allow Capital Allocation Flexibility, Jan. 19, 2022