Constellation Software Outlook Raised to Positive by S&P on Rapid Deleveraging

S&P Global Ratings has upgraded its outlook on Constellation Software Inc. (TSX:CSU) to positive from stable, while affirming the vertical market software provider's BBB issuer credit rating. The revision reflects the company's successful deleveraging in recent years, driven by robust free operating cash flow that has outpaced acquisition spending.

Strong Cash Flow Drives Deleveraging

The rating agency highlighted Constellation's impressive financial performance, noting that its S&P Global Ratings-adjusted net leverage stood at 1.1x EBITDA for the 12 months ending June 30, 2026. This marks a significant improvement from 1.7x in 2023.

This reduction in leverage was fueled by substantial growth in free operating cash flow (FOCF), which increased from $1.6 billion in 2023 to approximately $2.5 billion in 2025. S&P projects that FOCF will reach $2.8 billion in 2026, which is expected to cover the company's anticipated $2.6 billion in acquisition spending and keep leverage stable around the 1.0x mark.

Business Model and Acquisition Strategy

Constellation's ability to generate strong cash flow is supported by its resilient business model, which focuses on acquiring and managing mission-critical software companies across more than 100 distinct verticals. According to S&P, this diversification is a key strength, with no single customer accounting for more than 2% of revenue.

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Key characteristics of its business model include:

• Recurring Revenue: Maintenance and other recurring revenues have grown to nearly 75% of consolidated revenue, up from 70% over the past two years.
• Customer Retention: The company maintains high customer retention rates, which exceed 90%.
• Active M&A: Despite its focus on deleveraging, Constellation remains an active acquirer, completing four deals over $100 million in the first half of 2026, including Derby Soft and Synchronoss.

Path to a Ratings Upgrade

S&P Global Ratings indicated that a ratings upgrade for Constellation could occur over the next 12 to 24 months. A key condition would be the company maintaining its conservative financial policy, specifically keeping adjusted leverage at or below 1.5x following any debt-financed acquisitions.

Conversely, the outlook could be revised back to stable if leverage were to rise above the 1.5x threshold, either due to a more aggressive acquisition strategy or a downturn in operational performance, the agency stated.