NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Thomson Reuters Corp.'s (TRI) long-term Issuer Default Rating (IDR) and its senior unsecured ratings to 'BBB+' from 'A-'. The Rating Outlook is Stable.
Key Rating Drivers:
The downgrade reflects the company's change in its net leverage target from 2x to up to 2.5x. The company also announced its plans to repurchase up to $1 billion in shares by the end of 2014. The repurchases will be funded in part with additional debt. While Fitch expects initial net leverage will not materially exceed 2x in the near term, the company's announcement of its willingness to manage net leverage up to 2.5x is more reflective of its current rating.
The Stable Outlook reflects Fitch's comfort with management's effort in improving the F&R business's performance, its geographic and product diversification and its FCF generation. FCF will be pressured in the near term as a result of TRI's $500 million planned pension contribution and its $350 million restructuring charge. However, Fitch believes that in the long term FCF will benefit from the restructuring. Fitch calculated FCF should return to more robust levels (exceeding $700 million) by 2015.
Fitch recognizes that there are meaningful barriers to entry in TRI's core businesses. There are also a limited number of well-capitalized competitors that compete predominantly on product differentiation, quality and delivery.
Fitch believes management will continue to be disciplined in its approach to divestures and acquisitions. Fitch expects cash generated by operations to be used for investments into its core businesses, acquisitions and for return of capital to shareholders (via dividends and/or share buybacks).
Rating concerns include cyclicality of the Financial and Risk (F&R) segment. The segment was down 1% (down 3% organically) in the first nine months of 2013 (before the impact of foreign exchange). However, TRI's overall revenue/product diversification creates a cushion to absorb some pressures within a particular segment. Organic growth in TRI's other divisions mitigated most of the F&R organic decline, resulting in consolidated revenues up 2% (organic revenue down 1%), from ongoing businesses.
Fitch recognizes that in the near term, TRI continues to have some opportunity to reduce cost, particularly with elimination of legacy products, benefiting EBITDA margins. However, the ratings reflect the predominantly fixed-cost business and high operating leverage. Fitch's expects that, long-term, EBITDA margins will be more susceptible to downturns. During the recent downturn, the F&R segment generally exhibited less operating leverage (on an EBITDA basis) than Fitch would have anticipated. Cost reductions in connection with the integration of Reuters provided a significant offset to declines in revenues. Conversely, EBITDA margins would be expected to rebound meaningfully upon the return to revenue growth. The subscription nature of the business provides a lag which gives management visibility on the need for fixed-cost actions to preserve margins.
Also, as with other highly rated media companies, the potential threat of financial policy revisions is an inherent concern.
Rating upside is limited. However, an explicit commitment to and sustained track record of more conservative balance sheet metrics could merit upgrade consideration.
A significant acquisition or heavy repurchases that could lead to TRI operating materially outside its 2.5x net leverage target for several sequential periods, without a publicly stated plan to de-lever, could result in a negative rating action.
FCF, Liquidity and Leverage
Based on Fitch's calculations, last 12 months (LTM) free cash flow (FCF; after dividends) as of Sept. 30, 2013, was $609 million. Based on Fitch's conservative model, 2013 year end FCF is expected to be in the range of $50 million to $150 million. This FCF expectation includes TRI's announced $500 million pension funding and a portion of the cash component of its $350 million restructuring charge. Fitch's FCF expectations assume approximately $1 billion in capital expenditures.
TRI has guided to low single-digit growth in total ongoing revenues ($12.4 billion revenue base in 2012) and adjusted EBITDA margins in the range of 26% to 27% (26.6% in 2012). Fitch believes these targets are achievable and are reflected in Fitch's FCF expectations. That said, the ratings have tolerance for revenue and EBITDA margin expansion to be less than TRI's expectations.
Cash and cash equivalents totaled $607 million as of Sept. 30, 2013. Liquidity is also supported by TRI's $2 billion commercial paper (CP) program. The CP program is supported by its undrawn $2.5 billion revolving credit facility that expires May 2018. TRI has ample cushion inside of the facility's 4.5x net debt-to-rolling LTM adjusted EBITDA leverage covenant.
As of Sept. 30, 2013, debt totaled $7 billion, Fitch estimates unadjusted gross leverage at 2x, and unadjusted net leverage at 1.8x. Fitch expects unadjusted gross leverage to remain under 2.5x over the next few years.
TRI has the following near-term maturity schedule:
--$1.4 billion (face value) in notes maturing in 2014;
--Approximately $600 million coming due in 2015.
Given TRI's liquidity position, access to capital markets and FCF generation, Fitch believes TRI has the flexibility to address upcoming maturities, complete its planned $1 billion share repurchase by 2014 and make acquisitions. Fitch expects most acquisitions going forward will be smaller bolt-on acquisitions.
Fitch has taken the following rating actions:
--IDR downgraded to 'BBB+' from 'A-';
--Bank credit facility downgraded to 'BBB+' from 'A-';
--Senior unsecured notes downgraded to 'BBB+' from 'A-';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage