CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of 'BBB' to IHS, Inc. (IHS). Fitch has also assigned a 'BBB' rating to IHS' proposed initial offering of $500 million of senior unsecured notes due 2022. The Rating Outlook is stable. A complete list of ratings is outlined at the end of this release. As of Aug. 31, 2014, IHS had approximately $1.9 billion of debt outstanding.
Proceeds generated from the senior unsecured note offering are expected to be used to repay amounts outstanding under the company's senior unsecured term loan scheduled to mature during 2015 and to repay a portion of the $850 million borrowed under the recently completed revolver. As such the proposed transactions are expected to be leverage neutral. IHS will be the issuer of the senior unsecured notes and the notes will benefit by a guaranty from the same domestic subsidiaries that guaranty the company's credit facility. The notes will rank pari passu with the senior unsecured credit facility. Covenants include, among others restrictions on creating liens (subject to a leverage based incurrence test), limits on sale/lease-back transactions and restrictions on the company's ability to merge, consolidate or sell substantially all of its assets.
The company has amended and extended its existing credit facility to among other things increase the size of the revolver to $1.3 billion from $1 billion and extend the maturity date into 2019. Fitch notes, the IHS revolver allows certain foreign subsidiaries to borrow under the facility provided that total borrowings by the foreign subsidiaries are capped at $500 million. Certain non-domestic subsidiaries guarantee the foreign subsidiary borrowings, but not the domestic borrowings. This could place $500 million of the revolver ahead of the notes and the remaining credit facility borrowings. While this has a potential impact on recovery, given the proposed investment grade rating and the current enterprise value, Fitch does not currently distinguish the issue ratings for this foreign subsidiary borrowing limit. With the exception of this foreign borrowing sublimit, the debt issues are pari passu with one another. The company does not currently have any amounts outstanding under this sublimit.
KEY RATING DRIVERS
--IHS's strong competitive position and the breadth and depth of its highly integrated service offerings in six global, capital intensive industry verticals provide the company a competitive advantage and creates a high barrier for other entrants;
--The operating leverage inherent in the company's operating profile and service delivery platforms coupled with anticipated organic revenue growth positions the company to expand operating margins.
--The recurring revenue and cash flow characteristics of IHS' subscription based business model provide significant visibility, stability and predictability to the company's free cash flow generation.
--IHS' significant free cash flow generation affords the company with meaningful financial flexibility and de-leveraging capacity. Fitch expects FCF to EBITDA conversion to remain strong at around 65% driven by the low capital intensity nature of the business.
--Acquisitions are an important element of the company's overall growth strategy. The company's FCF generation capabilities enable it to rapidly de-lever following an acquisition. Fitch believes there is adequate flexibility to accommodate the company's acquisition strategy provided the company maintains its rigorous evaluation of potential targets and the acquisitions continue to strengthen the company's core competencies.
--Fitch expects IHS to maintain leverage within its 2x and 3x target. However, Fitch recognizes management will allow leverage to increase beyond the target to capitalize on strategic acquisitions. Fitch maintains there is sufficient capacity within the ratings for leverage to temporarily exceed the leverage target for the rating provided that leverage can be reduced below the high-end of the targeted range within 12 to 18 months following an acquisition.
Overall, the ratings reflect IHS' strong business profile, long-standing client relationships and core competencies, which leverage deep industry expertise and integrated service delivery platforms to provide data, analytics and research focusing on six global, capital intensive industries with highly connected supply chains: Energy & Natural Resources, Chemicals, Technology, Automotive, Aerospace & Defense and Maritime.
Fitch believes IHS' business model creates high barriers to entry associated with IHS' core businesses and that the capital needed and operational disruption to customers caused would make it challenging for competition to replace IHS. The company focuses on the various workflows within these industries, making its data, analytics and research an important component of IHS customers' workflow, and makes the offering 'sticky' to its customers. While there are data and analytic competitors within IHS' six vertical industries, there are limited competitors with the scale, depth and breadth of content.
Recurring, subscription-based revenues account for approximately 77% of IHS' consolidated revenues and provide significant visibility, stability and predictability to the company's free cash flow generation. The subscription based business model capitalizes on long-standing client relationships with nominal account churn. Fitch does not expect any material deviation from this well established revenue mix. Non-subscription revenues tend to be more volatile due to the timing of projects and the release of various products. Through the first nine months of IHS' fiscal 2014 (ended Aug. 31, 2014) subscription revenues grew 6% organically relative to the same period of fiscal 2013.
Fitch notes that revenues tend to be concentrated within the company's Energy and Natural Resources and Automotive industry verticals, however Fitch acknowledges the improved revenue and customer diversity brought on by the IHS' acquisition of R.L. Polk & Company during 2013. Fitch points out that overall revenue generation is concentrated among IHS' largest clients as the top 1,000 clients generate approximately 64% of revenues.
The ratings are supported by IHS' significant FCF generation, which affords the company with meaningful financial flexibility and de-leveraging capacity. Through the LTM period ended Aug. 31, 2014, FCF amounted to approximately $586 million as the company benefits from improved cash collections and other working capital initiatives. Fitch expects EBITDA to FCF conversion to remain strong at around 65% over the ratings horizon driven by the low capital intensity nature of the business. Fitch anticipates 2014 capital expenditures will range between 5.5% and 5%. The company has made several investments in internal systems and external user interfaces.
The company's key financial policies are focused on achieving organic revenue growth, scaling the business to expand operating margins and maintain a disciplined approach to acquisitions. Additionally Fitch expects the company will manage its leverage to its target ranging between 2x and 3x during the ratings horizon while acknowledging the company is willing to temporarily operate outside its target for strategic acquisitions. Fitch does not expect the company to initiate a dividend in the near term and will maintain a modest share repurchase program to cover employee taxes related to stock-based compensation program.
Leverage through the LTM period ended Aug. 31, 2014 was 3.0x marking a significant improvement relative to 4.3x as of fiscal year-end Nov. 30, 2013. Fitch calculates the company's gross leverage by netting non-cash stock based compensation with cash share buy backs related to the company stock compensation program. All IHS employees participate in the company's stock comp program. In order to cover the employee's tax liabilities related to stock compensation awards, IHS allows employees to sell a dollar equivalent of shares to IHS to cover the tax liability. These share repurchases are discretionary. However, Fitch believes it is appropriate to net this cash outlay with the non-cash stock comp expense component.
Since the close of the R.L. Polk acquisition the company has directed free cash flow generation to reduce outstanding debt by nearly 20% from the end of the company's fiscal third-quarter (August 2013) to approximately $1.9 billion as of Aug. 31, 2014. FCF to adjusted debt metrics were 25.8%, 18.6% and 23.5% as of LTM Aug. 2014, YE2013, and YE2012 respectively. The 2013 decline in this metric was driven by the increase in debt related to R.L. Polk.
Overall, IHS' financial flexibility and liquidity position are solid considering its ability to generate consistent levels of FCF. The company's liquidity position is further supported by available borrowing capacity under the company's new $1.3 billion revolver. Commitments under the revolver are set to expire during July 2019. Balance sheet cash totaled approximately $262 million as of Aug. 31, 2014, of which a significant portion is held in foreign subsidiaries. Fitch points out that as of the third quarter just over 20% of IHS revenues are transacted in foreign currencies.
IHS' maturity schedule is manageable and Fitch believes that the company has sufficient financial flexibility through expected FCF generation, available borrowing capacity from the revolver, and capital market access to address near-term maturities. Near-term scheduled maturities, pro forma for the contemplated transactions are minimal and consist primarily of scheduled amortization from the company's term loans. Pro forma scheduled maturities consist of $35 million during each of 2015 and 2016 before increasing somewhat to $70 million during each of 2017 and 2018.
What Could Trigger a Positive Rating Action:
--IHS publically adopting a more conservative financial policy highlighted by unadjusted gross leverage target of 2.5x or lower (under Fitch's calculation).
--Positive operating momentum as evidenced by expanding EBITDA and FCF margins, growing diversity of its customer base, strong organic revenue growth, may lead to positive rating actions.
--Maintenance of a free cash flow to gross debt metric greater than 15% will also be a key consideration.
What Could Trigger a Negative Rating Action:
--Likely driven by a materially large acquisition, or multiple acquisitions, that increases leverage (as calculated by Fitch) over 4x, without the expectation of leverage reducing below 3x within 18 months.
--Shareholder friendly actions that drive leverage over 3.5x would likely pressure ratings.
--Moreover a weakening of IHS' operating profile as signaled by a persistent decline in the company's free cash flow to gross debt metric to below 10%, deteriorating operating margins and revenue growth erosion brought on by increased customer churn, difficult economic conditions or competitive pressure will also be a key consideration.
Fitch has assigned the following ratings with a Stable Outlook:
--IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage