NEW YORK--(BUSINESS WIRE)--Thomson Reuters Corp.'s (TRI) 'BBB+' Issuer Default Rating (IDR) will not be affected by the company's $1 billion share buyback program, according to Fitch Ratings. The recently announced buyback plan follows the completion of $1 billion share buyback program announced during July 2014.
Fitch continues to believe that TRI have sufficient capacity to accommodate returns to shareholder within the context its 2.5x net leverage target. Fitch estimates net leverage at approximately 2.2x as of the LTM period ended March 31, 2015.
TRI's capital allocation strategy will remain focused on investments in its core businesses, acquisitions and return of capital to shareholders (via dividends and/or share buybacks) while remaining disciplined in its approach to divestments and acquisitions.
TRI returned approximately $2.1 billion of capital (dividend and share repurchase) to its shareholders as of year-end 2014 representing a 43% increase relative to 2013. Total shareholder returns represented 121% of free cash flow (FCF) before dividends from ongoing businesses as of year-end 2014 compared with 81% in 2013 (adjusted for cash costs related to restructuring and pension contribution).
Overall, the ratings reflect TRI's strong business profile and competitive position created in part by the breadth and depth of its integrated service offerings in the financial and risk, legal, tax and accounting, intellectual property and science and media markets that provide the company a competitive advantage and create a high barrier of entry for other market entrants. The capital needed and operational disruption to customers caused would make it challenging for competition to replace TRI's services.
Recurring, subscription-based revenues accounted for approximately 87% of TRI's consolidated revenues during year-end 2014 and provide significant visibility, stability and predictability to the company's free cash flow generation. The subscription based business model capitalizes on long-standing client relationships and improving account churn. Fitch expects net sales within the company's F&R segment will continue to improve during the balance of 2015. Fitch does not expect any material deviation from this well established revenue mix.
Rating concerns include operating performance and cyclicality of TRI's F&R segment. However, TRI's overall revenue/product diversification creates a cushion to absorb some pressures within a particular segment. Fitch expects the ongoing migration of customers to TRI's newer products, including Eikon 4.0, and service platforms will lead to stronger revenue performance leading into 2015. These initiatives along with the company's simplification program initiatives are expected to strengthen F&R segment operating margins.
TRI generated approximately $435 million of FCF after dividends during the LTM period ended March 31, 2015. However, adjusting for TRI's cash costs related to restructuring, FCF amounted to approximately $685 million. Fitch expects that FCF will strengthen in line with anticipated operating margin expansion. Capital expenditures during 2014 are expected to be approximately $1 billion.
TRI's liquidity position is adequate for the rating given access to capital markets and expected FCF generation. Cash and cash equivalents totaled $769 million as of March 31, 2015. Liquidity is also supported by TRI's $2 billion commercial paper (CP) program. The CP program is supported by its undrawn $2.5 billion revolving credit facility that expires May 2018. TRI has ample cushion inside the facility's 4.5x net debt-to-rolling LTM adjusted EBITDA leverage covenant. TRI's debt maturity profile is well-laddered with C$600 million scheduled to mature during the remainder of 2015 followed by $500 million in 2016 and $1.1 billion in 2017.
Rating upside is limited. An explicit commitment to a more conservative financial policy including maintaining net leverage below 2x could merit upgrade consideration. In tandem with the adoption of a more conservative financial policy, Fitch would need to observe a stronger operating profile within the TRI's F&R segment as evidenced by sustained positive net sales and segment operating margins approaching 30%.
A significant acquisition or increased shareholder friendly initiatives that increase gross leverage, as calculated by Fitch to over 3x, or greater than 2.5x on a net leverage basis, in the absence of a publically stated plan to reduce leverage to its 2.5x target, could result in a negative rating action.
Fitch currently rates TRI as follows:
--Bank credit facility 'BBB+';
--Senior unsecured notes 'BBB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
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