NEW YORK--(BUSINESS WIRE)--Fitch Ratings has lowered the Issuer Default Rating (IDR) for The Western Union Company (Western Union) and all senior unsecured ratings to 'BBB+' from 'A-'. The Rating Outlook is Negative.
The ratings downgrade reflects the following considerations:
--Western Union provided initial guidance for 2013 that is significantly below expected 2012 results. Specifically, the company believes revenue may be flat to down modestly but GAAP operating income may be down 10% to 15% as margins decline.
--The company is planning to lower pricing for international remittance services in certain corridors beginning in the fourth quarter of 2012 in effort to regain lost market share in certain regions. The company is also planning to increase its investment in compliance and technology in the coming year which will increase operating expenses.
--Western Union raised its dividend per share by 25% beginning December 2012. Fitch estimates that the company's new dividend rate represents approximately 20% of expected 2013 EBITDA. This level is well in excess of similarly rated entities at the 'A-' level.
--The board of directors authorized an additional $550 million share repurchase plan which expires Dec. 31, 2013. The company has $194 million remaining on its 2012 authorization which expires at the end of this year.
--Fitch believes that the company's decision to increase its dividend and maintain its share repurchase activity in the wake of unusually poor guidance for 2013 is indicative of a change in philosophy at the company in terms of how it expects to manage the balance sheet and capital allocation going forward.
Fitch believes there are several drivers behind Western Union's need to reduce prices. The primary issue is the company's loss of the majority of its agents for its Vigo and Orlandi Valuta (OV) brands in Mexico related to new compliance regulations. These brands have historically been positioned as lower priced service providers for the U.S. to Mexico and Latin America corridors. Fitch believes Western Union will reduce prices at its Western Union branded agents to make up for the loss of Vigo and OV agents. In addition, Western Union has held prices relatively firm the past two years on average across its business which has resulted in EBITDA margin growth for its consumer to consumer segment but has evidently led to the company pricing itself out of certain markets. Price initiatives over the next year are intended in part to offset the lost competitiveness of the past 24 months. Fitch notes that the company undertook a similar initiative related to its domestic U.S. remittance business in late 2009 that subsequently resulted in significant revenue and market share growth.
The Negative Outlook reflects Fitch's belief that there is a significant increase in event risk following the third quarter earnings announcement as the stock price has declined nearly 30%. Fitch estimates that Western Union now trades at a forward enterprise value to EBITDA multiple of approximately 6x. Fitch believes that this could lead to a potential third party leveraging event, either in the form of an LBO or an activist investor forcing a leveraged recapitalization of the company. Of note, Fitch believes that the floating rate notes due March 2013, the 6.5% senior unsecured notes due February 2014, the 3.65% senior unsecured notes due 2018 and the 6.2% senior unsecured notes due June 2040 contain some form of a change of control provision.
The ratings could be lowered if Western Union significantly increases leverage to fund shareholder friendly actions or if EBITDA profit margins do not rebound from the historically low levels expected in 2013. The ratings could be stabilized if Western Union's pricing initiatives lead to material gains in share and revenue growth as well as a rebound in the equity valuation of the stock.
Fitch believes that Western Union's core business model remains intact as does its superior competitive position. Fitch believes that cash-based remittance, particularly on the receive side, will continue to represent the vast majority of the overall market which limits the potential competition from cash-less based remittance alternatives. As a result, Western Union's strength in breadth and scale of agent locations will likely remain fundamental to the business. Fitch believes that these recent developments may lead to lower EBITDA margin expectations longer term for the company, although it is equally possible that margins will rebound with strong revenue growth. Either way, Fitch expects the company to remain the dominant remittance provider with strong margins and free cash flow as well as a high return on invested capital. This supports the high investment grade nature of the credit but also leads to significant event risk from investors that see an opportunity to leverage the balance sheet.
Credit strengths include:
--Extensive domestic and growing international agent network with a strong worldwide brand.
--Revenue stability from strong global diversification and consumer exposure.
--An asset-light business model with a largely variable cost structure due to the company's network of agents which generally own and operate the retail locations.
Credit concerns include:
--The compliance risks associated with regulations governing Western Union's business in numerous jurisdictions worldwide. The company recently received a subpoena by the U.S. Attorney's Office in California related to an investigation against a former Western Union agent. The company was also notified that it is the subject of an investigation into structuring and money laundering. It is not possible to estimate the potential liability, if any, to the company from this action.
--New payment technologies could challenge traditional remittance services, particularly if certain economies broadly adopt cashless payments, however, this trend will likely take years to materially impact Western Union, if at all.
--Event risk dominated by shareholder friendly actions as the ratings incorporate Fitch's expectation that Western Union will use the majority of its excess free cash flow for stock buybacks and acquisitions.
--The risk of adverse political environments or legislation impacting migration flows although this risk is mitigated by Western Union's broad geographic diversification.
--Significant foreign currency exposure given broad international diversification although natural hedges in the cost structure of the business essentially protect profitability as a percentage of revenue.
--Longer term, Western Union is likely to face increased competition from regional and multi-national banks entering the remittance market. However, Western Union's relatively unique customer base represents a potential asset to financial institutions looking to offer traditional services to migrant workers which the company may be able to monetize in the future.
Liquidity as of Sept. 30, 2012 was solid with cash of $1.4 billion and $1.5 billion available under a $1.65 billion senior unsecured revolving credit facility, expiring January 2017, which fully supports Western Union's $1.5 billion 4(2) commercial paper program. In addition, free cash flow was approximately $700 million over the latest 12 month period.
Total debt as of Sept. 30, 2012 was $3.4 billion consisting principally of $150 million outstanding in commercial paper with an average term of one day, $300 million in floating rate (L plus 58 basis points) notes due March 2013; $500 million in 6.5% senior unsecured notes due February 2014; $1 billion in 5.93% senior unsecured notes due October 2016; $400 million in 3.65% senior unsecured notes due August 2018, $325 million in 5.253% senior unsecured notes due April 2020; $500 million in 6.2% senior unsecured notes due November 2036; and $250 million in 6.2% senior unsecured notes due June 2040.
Fitch has lowered the following ratings of Western Union:
--IDR to 'BBB+' from 'A-';
--Senior unsecured to 'BBB+' from 'A-'; and
--Senior unsecured credit facility to 'BBB+' from 'A-'.
Fitch has affirmed the following ratings of Western Union:
--Short-term IDR at 'F2';
--Commercial paper (CP) program at 'F2'.
The Rating Outlook is Negative.
WHAT COULD TRIGGER A RATING ACTION
Future developments that may, individually or collectively, lead to negative rating action include:
--A significant increase in leverage to fund shareholder friendly actions; or
--If EBITDA profit margins do not rebound from the historically low levels expected in 2013.
Future developments that may, individually or collectively, lead to positive rating action include:
--The current Rating Outlook is Negative. As a result, Fitch does not currently anticipate developments with a material likelihood, individually or collectively, leading to a rating upgrade.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012;
--'Evaluating Corporate Governance', dated Dec. 13, 2011;
--'Rating Technology Companies', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Rating Technology Companies