NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Dun & Bradstreet Corp. (D&B) to 'BBB'. The Rating Outlook has been revised to Stable from Negative. A full list of ratings follows at the end of this release.
The one notch rating downgrade reflects Fitch's expectation that the company's credit metrics will remain elevated, relative to its previous ratings, for the next several years due to incremental business investments in 2014 intended to accelerate top-line growth. Although Fitch believes the investments are prudent, D&B's metrics are consistent with a 'BBB' rating. The Stable Outlook reflects Fitch's belief that the company can successfully execute its investment strategy and improve operating performance over the next two to three years.
As of Dec. 31, 2013, approximately $165 million remained on D&B's $1 billion share repurchase authorization. D&B has partially funded these share repurchases with additional debt. Total debt balances as of Dec. 31, 2013 are at $1.5 billion and Fitch calculates unadjusted gross leverage at approximately 2.7x. Fitch's base case model expects debt to increase to $1.7 billion and leverage to reach approximately 3.2x by year end 2014.
While leverage of 3.2x exceeds Fitch's 3x target for the current rating, the ratings and Outlook reflect Fitch's expectation that D&B will reduce leverage to below 3x by year end 2015, through EBITDA growth and absolute debt reduction. D&B's 2013 FCF generation ($216 million after dividends), strong EBITDA margins (above 30%) and solid coverage metrics (interest coverage of approximately 14x) provide flexibility in the ratings to endure elevated leverage in the near-term. However, there is limited room in the ratings for the company to fall short of Fitch's expectations. Fitch models consolidated revenues to be flat to up low single digits in 2014 and EBITDA margins to range from 31% to 32%.
D&B has not committed to a leverage target; however, management has stated that it is committed to an investment grade rating. Fitch expects the company to deploy cash towards reinvestment, acquisitions, shareholder friendly actions and reducing its revolver borrowings (following the completion of its $1 billion share repurchase authorization).
Fitch believes that management is focused on returning D&B to low-to-mid-single digit revenue growth in the next few years, supported by $70 million to $80 million in operational investments in 2014. This investment in product and services (mostly personnel) will predominately be a recurring addition to operating expenses. The company has initiated cost reduction actions designed to offset about half of these investments. This investment initiative is reflected in Fitch's revenues, EBITDA and FCF expectations.
KEY RATING DRIVERS
The ratings are supported by D&B's ability to generate strong, consistent FCF; high barrier to entry relating to its database; and the company's ability to leverage its database into multiple revenue-generating products. The ratings also reflect the visibility of the company's revenue base, as well as Fitch's belief that management will be financially prudent with acquisitions.
Rating concerns include limited revenue diversification (over 60% of total revenue is from D&B's Risk Management product line [RMS]). The ratings incorporate the recent pressures in North American RMS (approximately 40% of total revenues), down 1% in 2013 (compared to down 4% in 2012). The decline has been driven in part by competitive pressure in the small to medium business client base. Fitch's base case model expects continued pressures in 2014, with total RMS (North America and International) revenues roughly flat and modest revenue growth in 2015.
Ratings reflect the ongoing investigation into Shanghai Roadway D&B Marketing Services' (Roadway) potential violation of the U.S. Foreign Corrupt Practices Act (FCPA). The company self-reported the potential FCPA violations to the U.S. Securities and Exchange Commission and U.S. Department of Justice. Currently, the timing and potential fines related to this investigation are unknown. D&B has shut down Roadway, and the impact on consolidated operations has been minimal. Given the size of the operations (approximately $22 million in revenues and $2 million in operating income in 2011), Fitch believes any fines would be manageable within the company's consolidated credit profile and liquidity. Fitch notes that the Chinese authorities completed their investigation, and the resulting fines levied against D&B were negligible.
Liquidity and Leverage Profile
D&B has adequate liquidity, supported by approximately $333 million of availability under its $800 million credit facility due 2016 and $236 million in cash ($225 million held outside of the U.S.), as of Dec. 31, 2013. The company's maturity schedule is manageable and consists of $300 million senior notes due November 2015, $467 million revolver balance due October 2016, $450 million in senior notes due 2017, and $300 million in senior notes due 2022. Fitch expects D&B to have sufficient liquidity and access to the capital markets to meet all debt maturities.
In 2013, D&B generated roughly $216 million of FCF (after dividends), with a solid FCF to debt ratio of approximately 14%. Fitch expects this metric to decline to approximately 11% in 2014 and improve to 12% by 2016. Fitch expects annual FCF (after dividends) to be approximately $175 million to $225 million in 2014 and 2015.
D&B's total pension plans were underfunded by $376 million at year-end 2013, under U.S. GAAP calculations. Roughly 70% of the pension obligation is related to the U.S. qualified plan, which is $85 million underfunded and was frozen in 2007. Fitch believes the company will have sufficient liquidity to handle its funding obligations, in accordance with the Pension Protection Act, and is reflected in Fitch's FCF expectations.
A publicly stated financial policy, which may include a commitment to maintain leverage at or below 2.5x, and traction with the company's turnaround in its RMS business (evidenced by improved revenue and EBITDA margin performance), could lead to positive rating momentum.
The ratings may be downgraded if the company is unable to demonstrate traction with its revenue turnaround and/or indications that leverage would be expected to remain above 3x beyond 2015. Also, a change in financial policy indicating more aggressive shareholder returns that drove leverage beyond 3x would pressure the ratings.
Fitch has taken the following rating actions:
--IDR downgraded to 'BBB' from 'BBB+';
--Short-term IDR affirmed at 'F2';
--Bank credit facility downgraded to 'BBB' from 'BBB+';
--Senior unsecured notes downgraded to 'BBB' from 'BBB+'.
--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 - Effective from 8 August 2012 - 5 August 2013