NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDR) for MoneyGram International Inc. (MoneyGram) and MoneyGram Payment Systems Worldwide, Inc. (Worldwide) at 'B+'.
The rating and Outlook are supported by the following considerations:
--MoneyGram's leading market position as the second largest provider of international remittances with 244,000 agent locations worldwide.
--Fitch expects the market for remittance services to be as stable, if not more so, than the overall global economy, buoyed by favorable secular trends of labor migration.
--Fitch believes that MoneyGram should be able to continue to increase its share of the overall remittance market at the expense of smaller, less well-capitalized competitors which are disadvantaged by increasingly stringent changes to global regulatory requirements.
--MoneyGram also benefits from a high degree of variable cost in its business model as most agent locations are compensated by commissions and the company itself owns very few retail locations.
Ratings concerns include the following:
--MoneyGram's largest agent is Walmart, which accounts for approximately 30% of its total revenue. The company's agreement with Walmart expires in January 2013. A failure to extend this relationship could significantly challenge the company financially given its relatively high leverage ratio. Of note, the current agreement with Walmart was last extended in 2008 in conjunction with MoneyGram's 2008 recapitalization. As part of that agreement, the company's private equity owners entered into a side agreement with Walmart to share a portion of profits from the deal. Fitch notes that ownership remains largely unchanged from 2008 and this has the potential to support any effort to extend the Walmart relationship.
--The compliance risks associated with regulations governing MoneyGram's business in numerous jurisdictions worldwide;
--The risk of adverse political environments or legislation affecting migration flows, although this risk is mitigated by the company's broad geographic diversification;
--MoneyGram has been informed that it is being investigated by a federal grand jury in connection with its consumer anti-fraud and anti-money laundering program matters for the period 2004 to early 2009. A prior similar investigation led to MoneyGram paying an $18 million fine, although that is not necessarily indicative of the potential liability related to this latest investigation.
--The company's ability to invest in new remittance technologies, such as mobile phone payments, which pose a long-term competitive threat.
In May 2011, MoneyGram completed a conversion of its preferred series-B shares into common stock (including a portion into common stock equivalent series-D preferred shares). The company paid preferred shareholders a total of $218 million to effect the transaction, but eliminated the 10% preferred series-B share dividend. Thomas H Lee (THL) and Goldman Sachs now own approximately 85% of the common stock of the company (on an as-converted basis), including THL with a 55% stake.
The ratings reflect the following financial expectations:
--Revenue growth in the mid-single digits based on current economic forecast - Could be down low single digits in a global recession;
- EBITDA growth should largely track revenue growth although higher SG&A spending in 2011 will dampen the current-year margin;
--Free cash flow which should range below $100 million annually. Fitch estimates free cash flow was approximately $80 million in 2010 after adjusting for changes in restricted assets;
--Fitch expects that MoneyGram will continue to use excess cash to reduce debt outstanding under its term loan. The company had repaid approximately $350 million in debt from 2008 through the March 2011 quarter before increasing debt by $200 million in the June 2011 quarter to fund its preferred share conversion (this does not include approximately $50 million which was borrowed and repaid intraquarter June 2011).
Liquidity as of June 30, 2011 was adequate and includes $141 million available under the company's senior secured revolving credit facility which expires May 2016, and $233 million in unrestricted assets. MoneyGram historically has categorized its entire cash balance as substantially restricted due to the liquidity requirements of its Payment Systems business.
Total debt as of June 30, 2011 was $839 million which includes $339 million outstanding, a senior secured term loan due November 2017, and $500 million of 13.25% senior secured second lien notes which mature in March 2018.
The Recovery Ratings (RRs) for MoneyGram reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of MoneyGram, and hence recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation scenario. In deriving a distressed enterprise value, Fitch estimates a distressed EBITDA value of $143 million, representing a 40% discount to MoneyGram's estimated pro forma operating EBITDA of approximately $239 million, which is roughly equivalent to the level of EBITDA necessary for MoneyGram to cover its Fitch estimated fixed charges (cash interest expense and maintenance capital expenditures). Fitch then applies a 6 times (x) distressed EBITDA multiple, which considers comparable current and historical market multiples, as well as the assumption that a stress event would likely lead to multiple contraction relative to historical levels. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event. Fitch also adjusts MoneyGram's distressed enterprise value for liquidity requirements to cover any estimated shortfall in restricted asset coverage for a stress scenario. The 'RR1' for MoneyGram's senior secured first lien bank facility reflects Fitch's belief that 91%-100% recovery is realistic. The 'RR3' for MoneyGram's senior secured second lien reflects Fitch's belief that 51%-70% recovery is realistic.
Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at 'www.fitchratings.com/recovery'
Fitch has affirmed the following ratings for MoneyGram:
--IDR at 'B+'.
Fitch has affirmed the following ratings for Worldwide:
--IDR at 'B+';
--Senior secured first lien credit facility at 'BB+/RR1'; and
--Senior secured second lien notes at 'BB-/RR3'.
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 Sep 20, 2010.
Applicable Criteria and Related Research:
Rating Global Technology Companies - Specific Rating Factors
Evaluating Corporate Governance
Corporate Rating Methodology