NEW YORK--(BUSINESS WIRE)--Thomson Reuters Corp.'s (TRI) 'BBB+' Issuer Default Rating (IDR) is not affected by today's announcement that it is exploring strategic alternatives for its Intellectual Property & Science (IPS) business, according to Fitch Ratings. TRI did not disclose terms of any potential transactions. Fitch notes that IPS comprised approximately 8% of TRI's latest 12 months (LTM) Sept. 30, 2015 total revenues and 9.5% of the company's EBITDA.
TRI plans to use any net proceeds from a potential transaction for general corporate purposes, including investing in core businesses, repaying debt and accelerating share buyback activity. Pro forma for a transaction, Fitch estimates TRI's total leverage of approximately 2.6x. However, as TRI remains committed to its target leverage, Fitch expects the company to use a sufficient portion of any net proceeds to adequately reduce total leverage. At Sept. 30, 2015, TRI had total debt outstanding of $8.6 billion.
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 (F&R), legal, tax and accounting 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 (FCF) 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 that the ongoing migration of customers to TRI's newer products, including Eikon 4.0, and service platforms should lead to stronger revenue performance going forward. These initiatives along with the company's simplification program initiatives have strengthened F&R segment operating margins.
TRI generated approximately $595 million of FCF after dividends during the LTM period ended Sept. 30, 2015. However, adjusting for TRI's cash costs related to restructuring, FCF amounted to approximately $754 million. Fitch expects that FCF will strengthen in line with anticipated operating margin expansion. Capital expenditures during 2015 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 $710 million as of Sept. 30, 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 $500 million scheduled to mature in 2016 and $1.1 billion in 2017.
Rating upside is limited. An explicit commitment to a more conservative financial policy including maintaining gross 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:
--Issuer Default Rating (IDR) 'BBB+';
--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'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)