Fitch Downgrades Verisk's IDR to 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Verisk Analytics, Inc. (Verisk) and Insurance Services Office, Inc. (ISO), a wholly owned subsidiary of Verisk, to 'BBB+' from 'A-'. Fitch affirms the short-term IDR at 'F2' per Fitch criteria. The Rating Outlook is Stable. The rating action follows the company's recent announcement that it will be acquiring Wood Mackenzie, a UK-based data analytics company focused on the energy, metals and mining and agricultural spaces. The downgrade is also driven by the increase in the company's leverage target to 2.5x. A complete list of ratings is provided at the end of this release.

The acquisition is valued at approximately $2.8 billion (GBP1.8 billion) and is expected to be financed by a combination of approximately $2 billion in debt and up to $800 million in equity. The capital structure will be finalized prior to closing, which is expected to occur within two to three months, subject to regulatory approvals. The transaction price represents a 17.3x multiple of target's fiscal year 2014 (FY14) EBITDA of approximately $162 million. Fitch expects pro forma leverage of approximately 3.5x at closing followed by a period of de-levering to the company's new target. Given the minimal overlap between the two businesses, synergies should be comprised primarily of revenue enhancements, with minimal expected expense savings. However, Fitch takes into consideration that Wood Mackenzie's tax rate of 22% allows the company to generate greater free cash flow (FCF) than a typical U.S. acquisition candidate.

KEY RATING DRIVERS

The rating action is largely driven by the new 2.5x leverage target. Fitch notes that management has a demonstrated track record of de-levering to target levels following prior debt funded acquisitions. The company has stated that it is focused on reducing leverage to 2.5x by year-end 2016. Fitch believes the company will de-lever to 2.5x within 12 to 18 months after closing based on strong EBITDA margins of 47% to 48% and annual FCF expectations of $550 million to $650 million in the projection periods.

The acquisition offers several benefits to Verisk. Wood Mackenzie is the leading data analytics intelligence provider in the energy, petrochemicals, metal & mining spaces and has strong positioning, client relationship, and earnings powers. Its business model and financial profile are very similar to Verisk's and represents new end markets with growth dynamics.

Verisk's dominant market position within its Property and Casualty (P&C) insurance related businesses along with Fitch's view that Verisk's core products are largely non-discretionary purchases for most if not all of its clients provide sufficient flexibility within the 'BBB+' ratings to accommodate the temporary increases in leverage. Merger and Acquisition activity will remain core to Verisk's overall strategy to grow the company's data and product offerings and expand internationally, thereby further diversifying its product offerings. Fitch believes the company will reduce its focus on additional acquisitions during the de-levering period. It may also reduce scheduled buybacks if additional liquidity sources are required.

As of Dec. 31, 2014, the company had solid liquidity consisting of $39.4 million in cash, and $827.9 million ($968 million following February payment) availability under its $990 million revolving credit facility due 2019. Verisk's liquidity position and overall financial flexibility is supported by FCF, which amounted to approximately $343 million as of Dec. 31, 2014. Fitch calculates FCF to adjusted debt of 20%, which is solid for the ratings. Fitch expects pro forma FCF to range from $550 million to $650 million during the ratings horizon and pro forma FCF to adjusted debt to return to approximately 20%.

Verisk's maturity schedule as of Dec. 31 2014 is well laddered and within FCF expectations, consisting of approximately $170 million due during 2015 and $50 million scheduled to mature during 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--De-levering to 2.5x within 12 to 18 months after close of transaction;

--Subdued acquisition activities with modest pick-up in following years;

--Buybacks modeled but with optional reduction in stressed scenarios;

-- CAPEX declines as a percentage of sales;

--Modest margin improvements with FCF of $550 million to $650 million in rating horizon;

--Transaction clears all necessary regulatory approvals.

RATING SENSITIVITIES

Fitch does not anticipate an upgrade within the rating horizon given the elevated leverage and the company's increased total leverage target. Fitch could upgrade the ratings if the company were to return to its previous leverage target of 2x with a rationale for such target and FCF to adjusted debt in the 20%-25% range.

Ratings may be pressured if the company's performance does not materially meet Fitch's expectations and leverage is unable to return to the 2.5x target level within 18 months. While not expected, material share buyback activity or additional debt-funded acquisitions that delayed the company's planned leverage reduction may also pressure the ratings.

Fitch's ratings for Verisk and its wholly owned subsidiary, Insurance Services Office, Inc., are as follows:

Verisk

--Long-term IDR downgraded to 'BBB+' from 'A-';

--Short-term IDR affirmed at 'F2';

--Senior unsecured notes downgraded to 'BBB+' from 'A-'.

ISO

--Long-term IDR downgraded to 'BBB+' from 'A-';

--Short-term IDR affirmed at 'F2';

--Revolving credit facility downgraded to 'BBB+' from 'A-';

--Unsecured private placement notes downgraded to 'BBB+' from 'A-'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981118

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Contacts

Fitch Ratings
Primary Analyst
Jack Kranefuss
Senior Director
+1-212-908-0791
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1-212-908-9175
or
Committee Chairperson
John Culver, CFA
Senior Director
+1 312-368-3216
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jack Kranefuss
Senior Director
+1-212-908-0791
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1-212-908-9175
or
Committee Chairperson
John Culver, CFA
Senior Director
+1 312-368-3216
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com