CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of The Western Union Company (Western Union) at 'BBB+' and the short-term IDR at 'F2'. The Rating Outlook is Stable. See the full list of ratings at the end of the release.
KEY RATING DRIVERS
Strong Competitive Position: Fitch believes Western Union operates from a strong competitive position, particularly with regard to the receiving end of its traditional cash-based remittance business. While there is some encroachment on the money transfer business in the developed economies from mobile and digital platforms, Western Union is investing in these platforms as well, and expanding markets where it can make account-based deposits. Western Union is strongly positioned as the largest provider with an extensive domestic and international agent base. The company is the largest operator in a fragmented market, with more than 500,000 agent locations located in more than 200 countries and territories. The company has an approximate 15% share in the cross-border remittance business, with its next largest competitor having approximately one-fourth the revenues of Western Union.
Consumer to Consumer Segment: With approximately 80% of consolidated revenues, the Consumer-to-Consumer segment is Western Union's core business. The company has experienced greater price competition in the domestic money transfer business related to higher principal amounts, and plans to adopt targeted pricing actions where competitors have been active. On an overall basis pricing pressures abated in 2014 from 2013, as revenues on a constant currency basis grew 3% on 5% transaction volume growth; in 2013, revenues on a constant currency basis declined 3% on a similar, 5% volume growth.
New Payment Technologies: New payment technologies are challenging Western Union's business in developed markets but are having a slower impact on the traditional remittance services to developing countries. The company is directing resources to compete in these areas, and has been expanding the forms of remittance through digital and mobile platforms as consumers adopt such platforms. In the U.S. and Canada, where Western Union may have the greatest exposure, domestic money transfers have accounted for a relatively small 8% of consolidated revenue over each of the past three years.
Foreign Currency Exposure: Given the broad diversification of the company's revenue, foreign currency exposure is significant. The company's greatest exposure is with principal settlements and this is largely eliminated by spot and forward contracts, and also by the fact that the majority of money transfer transactions are paid the next day and agent settlements occur within a few days in most instances. The company also hedges revenue to provide cash flow predictability. The hedges only partly offset the revenue impact but have a much greater offsetting impact to profits. Additionally, there are natural hedges in the cost structure (commissions paid in local currencies) that protect the company's profitability as a percentage of revenue.
Compliance Costs: Compliance costs have risen over the past several years, from approximately $60 million in 2011 to about $180 million in 2014. These costs are largely unavoidable. Some compliance costs may be fixed, which may prove to be an advantage for Western Union, given its scale. To partly offset compliance cost increases, the company has been controlling costs by shifting certain operations from higher cost areas to lower cost areas.
Leverage Expectations: Fitch expects leverage to approximate 2.4x to 2.5x over Fitch's rating horizon. In Fitch's view, at the current 'BBB+' rating the company's financial flexibility is constrained.
FCF: Western Union generates solid free cash flow (FCF) although Fitch expects FCF to decline in 2015 by roughly one-third, owing to higher capital spending and the potential for a $100 million tax settlement, which may fall partly or entirely in 2015. In 2014, FCF rebounded to $602 million from the $570 million in 2013. FCF had declined in 2012 and 2013 from a peak of $818 million in 2011, owing to higher capital spending levels and increases in the dividend. Capital spending declined in 2014, driven mainly by the lower capitalization of contract costs (agent contracts for new agents and renewed agent contracts). The company has also incurred spending on information technology.
Capital Allocation: In February 2015, the company raised its dividend 24% and authorized a new, $1.2 billion common share repurchase program. In 2014, Western Union returned $750 million to shareholders. Fitch expects shareholder returns, on average, to be funded primarily from FCF.
Solid Liquidity: Liquidity at the end of 2014 was bolstered by cash balances of $1.8 billion and availability on its $1.65 billion senior unsecured revolving credit facility. Approximately $950 million of the cash was held by foreign entities. Repatriating foreign earnings would have tax consequences in many instances. Offshore cash has been used to fund acquisitions outside the U.S. and to provide initial funding of principal transactions under C2C and Business Solutions transactions. The credit facility supports Western Union's $1.5 billion commercial paper program. The revolving facility expires January 2017. Further support to liquidity is provided by FCF, which in 2014 was $602 million.
Total Debt: As of Dec. 31, 2014, debt totaled $3.7 billion. Near-term maturities consist mainly of $250 million floating rate senior unsecured notes due August 2015; $250 million in 2.375% senior unsecured notes due December 2015; and $1 billion in 5.93% senior unsecured notes due October 2016.
--In 2015, revenues will be pressured by foreign exchange headwinds. Normalized revenue growth of 4% in 2016 going forward (based on constant currency revenue growth over 2011-2014 of 5%, 5%, -1%, 4%, respectively;
--EBITDA margins stabilize around 25%-27%;
--Compliance costs rise from 3.3% of revenues in 2014 to 3.5% to 4.0% in 2015; and
--Stock repurchases under the $1.2 billion program are expected to occur over 2015-2017.
Positive Action: A positive rating action could occur if:
-- EBITDA margins are sustained, coupled with high single digit revenue growth over several years, combined with leverage approximating 2.0x.
Negative Action: A negative rating action could occur if:
--Western Union increases leverage above 2.5x on a sustained basis to fund future acquisitions or shareholder friendly actions. In addition, the ratings could be downgraded if EBITDA profit margins decline from additional pricing pressures which would suggest a more significant and prolonged competitive challenge than what is currently factored into the ratings.
Fitch has affirmed the following ratings. The Rating Outlook for all ratings is Stable.
The Western Union Company
--Long-term IDR at 'BBB+';
--Senior unsecured at 'BBB+';
--$1.65 billion senior unsecured credit facility at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) program at 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Business Services - DAP - Ratings Navigator Companion' (Feb. 17, 2015).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Business Services -- DAP: Ratings Navigator Companion