Moody's: Weak lien covenants raise M&A risk for large US IT companies but change of control protections are solid

Weakness in liens covenants expose bondholders of US investment-grade software and IT services companies to greater risk in the event of a large, debt-financed merger and acquisition, while change of control provisions offer better protection from an issuer being acquired, Moody's Investor Service says in a new report.

Liens covenants and change of control provisions can be protective to bondholders in LBO scenarios. Lien covenants limits the amount a company can borrow to finance a leveraged buyout and what assets can be used as collateral. Change of control provisions are protective against fundamental changes in ownership.

"The change of control put option is most relevant for bondholders of a target company. Bondholders of larger, mature companies are more likely to be the acquirer, and more likely to be exposed to liens subordination risk if the company assumes debt from the target or experiences deterioration in its own credit profile," co-author and Moody's Vice President -- Senior Covenant Analyst Evan Friedman says in "Weak Liens Covenants Raise M&A Risk But Change of Control Provisions Offer Better Protection."

Among the 11 companies assessed, Computer Sciences Corporation (Baa2 Stable) has the best covenant protections with the most protective liens pledge and relatively strong change of control language. It is among three Moody's evaluated as having an increased LBO risk based on its valuation measures.

"The company is an attractive LBO candidate, though the transaction would be large given CSC's sizable market capitalization," co-author and Moody's Vice President - Senior Credit Officer Stephen Sohn says.

CA Inc. (Baa2 Stable) and Autodesk Inc. (Baa2 Stable) have the least protective liens and change of control covenants. CA faces an above average risk as a takeover candidate while Autodesk's high EV/EBITDA makes it a more expensive purchase.

Adobe Systems Inc. (Baa1 Stable) has the least protection of those indentures containing change of control language, while its liens covenant is among the most protective we analyzed, since it restricts secured debt on property or assets of the parent and its subsidiaries. Most high grade companies' liens only restrict pledges securing property, plant and equipment.

Cadence Design Systems, Inc. (Baa2 Stable) has weak liens protection, but offers the most protective change of control covenant. Intuit (Baa1 Stable) also has weak liens protection, while change of control protections are adequate. The company has little debt outstanding, which is likely to further diminish.

Symantec Corp's (Baa2 Review for downgrade) change of control protections are stronger than its liens protections, which are weak. The liens offer flexibility in how it can secure debt and the assets it uses. The company is in the process of a spin-off however, and management's plans for the capitalization of the remaining entities is still unknown.

Equifax Inc's (Baa1 Stable) liens and change of control covenants provide adequate protection against merger and acquisition risk. Fidelity National Information Services, Inc. (Baa3 Stable) would be an expensive takeover target, but its outstanding notes offer good liens and change of control protections.

Moody's says Microsoft Corp. (Aaa Stable) is an outlier since its bonds lack both liens covenant and change of control provisions. If it acquired a company, the current notes could be subordinated, although this risk is very low. Microsoft itself is unlikely to be a takeover target, or see any major shift in control.

Oracle Corp (A1 Stable) does not have change of control protection and its liens pledge is good. Like Microsoft, it has a low event risk