NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB+' ratings for Broadridge Financial Solutions, Inc. (Broadridge), including the Issuer Default Rating (IDR) and senior unsecured debt. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release
The ratings and Outlook are supported by the following considerations:
--Broadridge's leading share in the proxy distribution market, which Fitch views as having minimal competitive threats and pricing that is largely insulated by SEC regulations;
--The company's core Investor Communications and Securities Processing business segments produce steady free cash flow with minimal exposure to economic volatility;
--Long-term customer contracts and customer relationships in both core businesses;
--Broadridge's diverse customer base with no customer representing greater than 7% of total revenue and expectations of achieving greater geographic diversification by capitalizing on growth opportunities in international markets going forward;
--The low capital intensity of Broadridge's business model which has produced high historical returns on invested capital.
Ratings concerns include the following:
--Changing regulations which could negatively impact Broadridge's business, particularly related to the proxy distribution business;
--Broadridge's acquisition growth strategy which carries integration and execution issues;
--Execution risk related to the company's processing of confidential client information and the risk of security breaches as well as operating risks stemming from the mission critical nature of the company's securities processing solutions.
Broadridge has increased its share repurchase activity over the past two years, in part funded by the proceeds from its divestiture of its Ridge Clearing business. However, the company had disappointing results through the first three quarters of fiscal 2011 (end June 2011) due in large part to a reduction in mutual fund event driven investor communication services which are volatile and difficult to predict by definition. Given the company's relatively high fixed cost structure, this has resulted in a modest reduction in profitability at the same time the company has borrowed on its revolving credit facility to fund several sizable acquisitions. The ratings incorporate the expectation that the results from fiscal 2011 represent a cyclical low in the investor communications business and that a further reduction in margin or revenue decline, without an offsetting change in the balance sheet, could lead to negative ratings action.
The ratings reflect the following financial expectations:
--Broadridge can organically grow revenue in the low to mid-single digits with periods of higher growth driven by acquisitions;
--EBITDA margins should remain steady in a range near 20%;
--Broadridge will use free cash flow to reduce debt outstanding under its revolver which was utilized to fund its recent acquisition of Matrix Financial Solutions;
--Cash flow leverage, measured as FFO less capital expenditures and dividends to adjusted debt, remain within a range near 20% with adjusted debt to EBITDA of 2 times or less;
--Broadridge will utilize excess free cash flow for share repurchases;
--Quarterly results will remain volatile depending on the level of event driven revenues but as Broadridge continues to diversify its business beyond proxy services, year-to-year volatility in results will be reduced.
Liquidity as of March 31, 2011 was solid at $411 million which includes $151 million in cash and $260 million available under the company's $500 million senior unsecured revolving credit facility which matures in March 2012. Fitch expects annual free cash flow to average between $150 million and $200 million.
Total debt as of March 31, 2011 was $564 million which includes $240 million drawn on the company's aforementioned revolving credit facility, $200 million outstanding under a senior unsecured term loan facility which matures March 2012 and $124 million in senior unsecured notes due June 2017.
Fitch affirms Broadridge's ratings as follows:
--IDR at 'BBB+';
--Senior unsecured revolving credit facility at 'BBB+';
--Senior unsecured debt at 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 13, 2010;
--'Evaluating Corporate Governance', dated Dec. 16, 2010;
--'Rating Global Technology Companies Sector Credit Factors', dated Sept. 20, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Rating Global Technology Companies - Specific Rating Factors