Fitch Ratings has revised the Rating Watch for NCR Corporation's Long-Term Issuer Default Rating (IDR), and the IDRs for subsidiary co-borrowers NCR Limited, NCR Nederland B.V., and NCR Global Solutions Limited, as well as the company's senior secured facilities and issue-level ratings, to Negative from Evolving.

This action follows recent details NCR has provided on its planned separation into two separate companies. Fitch rates the senior secured revolver and term loans issued by each of the entities 'BB+'/'RR2'. In addition, Fitch rates the senior unsecured bonds and convertible preferred shares issued by NCR Corp. 'BB-'/'RR4'.

The ratings affect approximately $6.3 billion of gross debt as of September 2022, not including unused capacity on the $1.3 billion senior secured revolving facility, but including $275 million of preferred stock and the $300 million A/R securitization facility.

Key Rating Drivers

Separation into Two Companies: The Rating Watch reflects uncertainty surrounding the projected 2023 separation of the company into two public companies, with NCR planning to spin-off its ATM-related businesses (ATM SpinCo) to shareholders. NCR provided high-level capitalization frameworks for NCR (RemainCo), but the company still has deleveraging targeted over the next year that could impact final capitalization post spin-off. Fitch believes RemainCo will be solidly positioned in many of its end markets, including retail, hospitality and digital banking.

The ATM-related businesses that face long-term secular pressures will be spun-off to shareholders. Fitch expects both companies will generate solid and positive FCF that should enable them each to grow over time. However, the stand-alone cost and FCF generation profile of RemainCo will guide its ability to grow and compete over time.

RemainCo Solid Position, but Less Diversified: RemainCo will include its Retail, Hospitality and Digital Banking segments. Fitch believes NCR holds solid positioning in each of these businesses, particularly in retail where it is a market leader with its self-checkout hardware & software and in restaurants with its Aloha software. RemainCo businesses comprised approximately $4.0 billion in revenue and $654 million in EBITDA (~16% margin) on a TTM basis as of September 2022.

Fitch estimates normalized FCF could be below $100 million (low-single digit as a percentage of revenue) in 2024 although the final debt profile and related interest expense will be a core driver to cash generation, along with incremental stand-alone and one-time costs. FCF could be constrained in 2023 by deal-related costs.

Leverage Profile: NCR signaled it will generate $500 to $800 million of FCF ahead of its planned spin-off, currently projected by YE 2023, and indicated it will use excess FCF to reduce its debt ahead of the spin. Fitch calculates NCR's gross debt/EBITDA in the high-4.0x range at September 2022, or above Fitch's negative rating sensitivity for the current IDR, but leverage should improve by YE 2023. Gross leverage was in the 3.0x-4.0x range prior to the Cardtronics acquisition.

Management guided net debt/EBITDA for RemainCo will be in the 3.0x-3.4x range post separation, which Fitch calculates could be mid- to high-3.0x range on a gross debt basis. This level of leverage is manageable for the current 'BB-' IDR, but Fitch is unclear on whether leverage well be sustained at these levels over time and on its future capital allocation policy.

CF Lower Post Separation: NCR's FCF profile will be meaningfully lower post the spin-off of its ATM assets, or potentially less than $100 million per year in 2024 per Fitch's estimate although final capitalization and one-time cash expenses will be key variables. NCR historically generated solid FCF in the mid- to high-single digit range as a percentage of sales, but the ATM businesses were more profitable, yet slower growing segments.

NCR generated positive FCF in all except two years from 2007-2021, with 2012-2013 being negatively impacted by approximately $800 million of pension contributions (FCF was positive during these years adjusted for these items). The company burned FCF YTD through September 2022 but projects to generate meaningful FCF in 4Q22/1Q23.

Recurring Revenue: More than 60% of NCR's revenue today is recurring, including products and services under contract where revenue is recognized over time. This recurring mix is materially lower than other companies Fitch rates in the payments and technology industries, at least partially owed to hardware sales, and is a consideration with respect to the IDR. Management seeks to grow this mix over time, which Fitch believes will come via a combination of internal sales initiatives, growth in payment processing (via its December2018 JetPay acquisition) and incremental M&A. Fitch is uncertain what portion of revenue will be recurring post ATMCo separation.

ATM Challenges: Fitch believes ATM sales and network fees could be pressured over the medium/long term as consumer habits shift further away from cash, although increased bank outsourcing could act as an offset. NCR's ATM assets are expected to be spun-off and will no longer be part of RemainCo post completion of the transaction projected by YE 2023. Consumers shifted further away from cash in recent years, particularly in certain markets such as the U.S. The Nilson Report projects cash usage (USD volume) among U.S. consumer payments could decline by 23% from 2020-2025 and cash as a percentage of U.S. payments transactions could shrink to 8%-9% by 2025 versus 17%-18% in 2020.

Fitch believes demand for cash/ATMs will have a long tail and NCR, as one of the market leaders in both hardware sales and as an independent network operator (via Cardtronics) will continue to derive material profitability from the business.

Competitive End Markets: NCR has meaningful presence in its key end markets, but competition is intense and fragmented in a number of areas. NCR has leading market share in retail point of sale (POS), restaurant software and self-checkout systems and is the #2 vendor in ATM manufacturing with 25%-30% share behind that of Diebold Nixdorf, Inc. It is also the world's largest non-bank ATM operator following its Cardtronics acquisition. However, it faces a range of competition from fintech providers, technology-focused disruptors and others that could limit growth over time.

Underfunded Pension: Fitch believes NCR's unfunded pension could be a use of cash in the future. The pension plan is expected to go with the ATMCo spun entity, although it is unclear if there will be a funding requirement pre-separation. Future contributions should be manageable given the company's historic track record of positive FCF generation. NCR's pension obligation was $3.0 billion and was underfunded by $502 million at Dec. 31, 2021. The company has domestic and foreign defined benefit pension and postemployment as well as domestic postretirement plans.

Derivation Summary

Fitch's ratings and Outlook for NCR are supported by the company's market position across its business, diversification of end markets, history of positive FCF generation, and manageable leverage for the rating category. The Rating Watch reflects potential for the IDR to move lower as NCR will be less diversified and have lower FCF upon separation of its ATM businesses in 2023. NCR does not have any direct comparables that compete across all of its segments given the diverse nature of its end markets, but Fitch assesses the rating relative to other payment and technology companies that provide a range of similar software, hardware and service offerings.

Unlike other companies Fitch rates in the fintech space, NCR's exposure to payments processing is minimal and the company derives most of its revenue and profitability from software, services and hardware. It operates a meaningfully lower margin business than other Fitch-rated fintech peers due to a higher mix of hardware and services. NCR has a stronger operating position than competitor Diebold Nixdorf Incorporated, which has much higher leverage, lower EBITDA margins (high-single digit percentage versus NCR's in the mid/high-teens) and burned FCF in recent years. Fitch believes the 'BB-' IDR fairly captures the risk profile relative to other companies in Fitch's rated technology and services ratings universe.

Key Assumptions

Fitch assumes spin-off of ATMCo occurs at YE 2023;

Organic revenue growth in the low to mid-single digit range in the coming years;

EBITDA margins remain relatively stable, with modest expansion over time, after being negatively impacted in 2022 from supply chain issues and FX;

Capex near 6.5% of revenue for RemainCo;

Excess cash flow used for debt reduction in 2023. Share repurchases resumed in 2023;

Gross leverage decreases from the high-4.0x range at September 2022 to mid-4x range for RemainCo (equivalent to approximately 3.4x net leverage reported by NCR) by YE 2023 upon separation.

RATING SENSITIVITIES

Fitch expects to resolve the Rating Watch Negative upon execution of the planned spin-off of NCR's ATM business that is projected to occur by YE 2023. Fitch could stabilize NCR's IDR at the current rating or downgrade, dependent upon Fitch's projection for NCR's stand-alone (RemainCo) capitalization and financial policy.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch-defined gross leverage, or debt/EBITDA, sustained at/below 3.5x;

Revenue expected to grow by low-to-mid-single digit percentage (3%-5%) or higher over multiple years, signaling an improved long-term growth profile;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Gross leverage sustained at/above 4.0x;

FCF margins expected to be sustained near 1.0% or below, or below historical levels;

Competitive and/or structural changes to industry that pressure revenue, EBITDA and/or FCF.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: NCR's liquidity is stable and should support its operations, growth and M&A strategy in the coming years although it remains unclear what the liquidity profile will look like upon separation in 2023. Liquidity is supported by: (i) $434 million of cash and equivalents as of September 2022, although much of this ($328 million) was held by foreign subsidiaries and could be taxed if returned to the U.S.; (ii) undrawn capacity on its $1.3 billion senior secured revolver; (iii) FCF generation, which ranged from $223 million-$629 million per year from 2016-2021 (FCF margins of 4%-10%). and (iv) up to $300 million of capacity under its A/R securitization facility. The company burned $44 million of FCF YTD through September 2022, but management expects to be CF profitable for FY 2022

Debt Profile: The majority of NCR's debt is fixed rate, including various senior unsecured notes issuances. Outstanding debt consists of: (i) $1.9 billion on a senior secured term loan facility; (ii) $558 million drawn on its $1.3 billion senior secured revolver; and (iii) $3.3 billion of senior unsecured notes with maturities ranging from 2027-2030. The company has a $1.3 billion senior secured revolver and a $300 million trade receivables securitization facility available for liquidity needs.

The company also has $275 million of series A convertible preferred stock outstanding, which Fitch considers to be debt as per Fitch's Corporate Hybrids Criteria. Post spin-off, Fitch expects RemainCo to maintain the majority of its currently outstanding senior notes and to restructure its secured revolver and term loans.

Issuer Profile

NCR operates as a software, services and hardware enterprise solutions provider, with products targeted at the banking, restaurant and hospitality sectors. Its offerings include digital banking and payment solutions, multivendor connected device services, ATMs, POS terminals and barcode scanners.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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