I have just finished my finance 1 coursework which was quite open ended but very interesting. In 1,200 words or less we had to conduct a credit rating of a company of our choice.
I picked Oracle as it is a company I am familiar with and has a very interesting position in the market. I mainly followed Moody’s credit methodology for global software industry and included some aspects from the S&P credit methodology.
Oracle sell a wide range of enterprise IT solutions, including databases, middleware, applications, and hardware. Software license updates and support, (its most profitable segments), account for about 50% of revenues. An active acquisition program is a fundamental component of the company’s strategy. Oracle has issued $27.8bn of debt, which accounts for almost 50% of the total rated debt in the sector.
|Market||Competitive young market with high margins and strong growth||AA|
|Competition||Very strong competition but Oracle is ranked number 1 or 2 in its key markets||A|
|Management||Stable, experienced management||AA|
|Product Line Diversity||Operates a broad portfolio with limited products in only one segment||AA|
|Geographic Diversity||Globally diversified; no single region has more than 45% of revenue||A|
|End-Market Diversity||Largest market up to 20% of sales||A|
|Market Share||#1 or #2 market share in all key markets||AA|
|Scale and flexibility||Value||My Rating|
|Free Cash flow||$7,447m||A|
|Profitability and coverage|
|Operating income ROA (net cash)||20.12%||A|
|Debt coverage and liquidity|
|Debt / EBITDA||0.88||A|
|EBITDA – CAPEX / Interest||16.83x||AA|
|Free cash flow / Debt||50.82%||AA|
|Cash + Mkt Sec / Debt||126.03%||AA|
|Long-term debt to equity||36.89%||BBB|
|Debt to equity||46.97%||BBB|
Oracle credit rating assessment
I concluded that Oracle is a global leader with large with dependable cash flows and excellent growth prospects. It is easily the second largest company in the industry after Microsoft (AAA).
Oracle is rated A2 by Moody’s and A by S&P, the second highest rating in the industry after Microsoft . My analysis rates Oracle AA; so some reasons for the differences might be:
- Ratings need to be forward looking whereas I have used historical data.
- Moody state ratings might depend on confidential information they cannot publish.
- Some hard-to-measure qualitative factors affect ratings.
- Oracle’s high debt levels relative to the industry may bring the rating down.
- I used a small sample of interviews to validate qualitative findings, which introduces subjectivity and bias.