Fitch Initiates 'A-' IDR on Thomson Reuters; Stable Outlook

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has initiated coverage of Thomson Reuters Corp. (TRI) with an 'A-' Issuer Default Rating (IDR). Reuters Group Limited's (formerly Reuters Group PLC) IDR has been upgraded to 'A-' from 'BBB+' and Reuters Finance PLC has been assigned an IDR of 'A-'. The Rating Outlook for each entity is Stable. See rating list and rating actions summary below:

Thomson Reuters Corp. (TRI)

--IDR assigned 'A-';

--Bank credit facility assigned 'A-';

--Senior unsecured notes assigned 'A-';

--Commercial paper assigned 'F2';

--Short-term IDR assigned 'F2'.

Reuters Group Limited (Formerly Reuters Group PLC)

--IDR upgraded to 'A-' from 'BBB+';

--Senior unsecured upgraded to 'A-' from 'BBB+';

--Commercial paper affirmed at'F2', withdrawn;

--Short-term affirmed at 'F2', withdrawn.

Reuters Finance PLC

--IDR assigned 'A-';

--Senior unsecured upgraded to 'A-' from 'BBB+'.

Fitch's ratings on TRI reflect:

--The company's meaningful cash flow generating ability, its sound balance sheet and its consistent and conservative financial policies. Fitch expects the company will target 2.0 times (x) unadjusted net leverage over the longer-term.

--The growth prospects as well as product-line and geographic diversity of its cashflow stream.

--Fitch recognizes there are meaningful barriers to entry in TRI's core businesses and that there are a limited number of well-capitalized, rational competitors that compete predominantly on product differentiation, quality and delivery (rather than on price).

--Unlike music, newspapers, directories and other advertising-based consumer media sub-sectors, TRI has already made the transition to electronic delivery and faces very little threat of substitution by digital transplants.

Rating concerns include:

--The cyclicality of the markets division;

--Integration risks;

--Acquisition risk;

--As with other highly rated companies, the potential threat of financial policy revisions is always a concern. This risk is mitigated to an extent by factors described below.

TRI has well balanced portfolio, generating roughly 60% and 45% of its pro forma revenue and EBITDA from the Markets division and 40% and 55% from the Professional division, respectively. The company will generate about 60% of its revenue from North America, 31% from Europe and 9% from the rest of the world (predominantly Asia). The combined company generates 88% of its revenue from electronic delivery and 86% of its pro forma revenue stream is described by the company as recurring.

TRI's divisions are each well-positioned in their markets and are exhibiting healthy operating performance. Consolidated revenues have grown above mid-single digits in recent periods, and pro forma consolidated EBITDA margins should expand modestly from 2007 levels of approximately 35% within the professional division and from around 22% in the markets division. The solid operating performance at its divisions and strong cash flow dynamics translated into meaningful consolidated pro forma 2007 free cash flow after dividends of around $700 million (as calculated by Fitch).

The professional division is comprised of Legal, Tax & Accounting, Scientific and Healthcare. The legal unit is the most established, making up more than half the division's revenue and EBITDA. The unit posts margins above 30% and management expects it to grow organically in the 6%-7% range. The Tax & Accounting unit has expanded solidly, growing in the low double digits and exhibiting margins above 25%. The healthcare and scientific divisions are growing below mid-single digits but both have margins above 20%. Fitch believes the professional division businesses represent defensive revenue streams that should still grow in an economic downturn. Given that this division represents around 55% of pro forma EBITDA, Fitch believes TRI's revenues are more stable in a downturn than traditional media companies that depend on more volatile advertising and hit driven revenue streams. This provides good balance to the portfolio and mitigates some risks associated with the more volatile Markets division.

TRI's Markets Division is exposed to several factors that are largely out of management's control, including the exposure to the changes in the general level of activity in the financial markets globally. Most notably, even while Reuters terminals business is subscription based, it exhibited meaningful volatility in past financial market downturns (obviously compounded in the last downturn by the impact of the transition to the Euro on its currency business). Fitch recognizes that the consolidated company has diversified its business globally and by product and has also engaged in enterprise contracts with major customers that should reduce the exposure to securities industry employment levels (subscription based on headcount). Fitch believes it's reasonable to expect that these actions have reduced cyclicality somewhat, but built into the rating is the tolerance for Markets division revenue to be down in a full, multi-year financial markets/economic downturn. Fitch notes, the subscription nature should provide a lag (six months to a year while subscriptions expire and are not renewed) which can give visibility on the need for fixed cost actions to preserve margins. Fitch expects that on a consolidated basis the company could generate free cashflow in a downturn.

Under normalized conditions, over the longer-term, TRI targets a dividend of around 40% of (pre-dividend) cashflow. Fitch expects TRI will remain acquisitive, focusing on smaller tactical deals, will target 2.0x unadjusted net debt to EBITDA leverage and could deploy remaining cashflow toward share repurchases or retain it on its balance sheet for future acquisitions or general corporate purposes. Due to the cashflow visibility of the business and favorable industry structures in which it competes, at the 'A-' rating level the company has some room to occasionally spike above its leverage target for prudent acquisitions.

Fitch also recognizes the risk that financial policies could be influenced by the Woodbridge Company Limited (53% pro forma ownership). While Fitch is mindful of this significant ownership concentration, Fitch understands Woodbridge to be a financially conservative, yet operationally aggressive, long term, cooperative, professional investor. Fitch notes that Woodbridge was supportive and instrumental in the radical transformation the company made in the 1990s from being predominantly an advertising supported, traditional media newspaper company, into being a digitally focused, subscription-based, professional publishing and financial information provider. Given its track record, the sizable dividend, healthy growth prospects and the potential for some share repurchases with excess free cashflow, Fitch believes the risks associated with Woodbridge's concentrated ownership are meaningfully mitigated.

Pro forma for the transaction, Fitch expects TRI to have around $8.0 billion in gross debt and gross leverage of approximately 2.4x. EBITDA growth over the intermediate term will allow it to grow into its unadjusted net debt to EBITDA target of 2.0x. While free cashflow (after dividends) to gross debt is weak for the rating at below 10%, cash from operations (CFO) to net debt is above 30% (with the difference predominantly driven by the sizable dividend). Fitch recognizes that Woodbridge currently participates in a Dividend Reinvestment Program (DRIP) for around 50% of its dividend. While this is a negotiated short-term arrangement (rather than a long-term commitment), Fitch believes it demonstrates the conservative, cooperative nature of Woodbridge and the potential that such arrangements in the future could provide an opportunity to similarly reduce the drain on cashflow (to an extent) under certain circumstances.

Thomson Reuters Corp, is expected to be the future issuer of debt securities, including any portion of the $3.0 billion in borrowings that is expected to be termed out under its GBP2.5 billion (approximately $4.9 billion) 364-day acquisition facility. Approximately $6.8 billion of debt will be at the Thomson Reuters Corp. (formerly Thomson Corp.) level. Approximately $1.2 billion of debt will be at subsidiaries of Thomson Reuters PLC (TRP, a U.K.-based publicly traded entity). TRI and TRP cross guarantee the debt obligations of one another. Of the $1.2 billion at subsidiaries of TRP, $500 million is at Reuters Group Limited (a direct subsidiary of Thomson Reuters PLC) and approximately $700 million is at Reuters Finance PLC (a direct subsidiary of Reuters Group Limited). In addition to the cross guarantee between TRI and TRP, there are downstream guarantees from TRP to Reuters Group Limited and from Reuters Group Limited to Reuters Finance PLC. Fitch recognizes there are no upstream guarantees from Reuters operations but given the 'A-' IDR, Fitch's expectations of stable financial policies, the short dated nature of the obligations on the TRP side (2008 and 2010 maturities) and the lack of any material restrictions on movements of cash between the entities, Fitch links the IDRs of the issuing entities and treats the unsecured debt of the entire company as pari passu.

On a going forward basis (after the liquidity position normalizes), TRI's pro forma liquidity should remain solid. Cash is likely to comfortably exceed Fitch's expectations of a $500 million maintenance level, there should be ample availability under the company's $2.5 billion revolving credit facility that expires Aug. 14, 2012, and TRI should be able to generate over $700 million of pro forma free cashflow (after dividends). TRI has around or less than $1 billion of debt coming due in each of the next five years.

Among other provisions, the $2.5 billion Thomson Reuters Corp credit facility includes a leverage covenant of 4.5x net debt to rolling last twelve months adjusted EBITDA and a change-of-control covenant which would go into effect if greater than 50% of outstanding shares were acquired. Fitch notes that bondholders do not have protection in the form of financial covenants nor do they have a cross-default with the bank facility. However, there is a limitation on liens over 10% of shareholders equity, excluding standard carve-outs and the most recent $800 million bond issuance did include a put (at 101) should a change of control and downgrade below investment grade occur.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have initiated by Fitch as a service to investors.