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Rating Action:

Moody's downgrades Western Union's rating to Baa1; outlook negative

Global Credit Research - 27 Nov 2012

Over $3.4 billion of debt rated

New York, November 27, 2012 -- Moody's Investors Service has downgraded The Western Union Company's senior unsecured rating to Baa1 from A3 while affirming the Prime-2 short term rating. The rating outlook remains negative.

"The downgrade to Baa1 and the negative ratings outlook reflect Moody's concerns over the sustainability of profits in Western Union's core money transfer business and continued shareholder friendly actions," said VP-Senior Credit Officer Stephen Sohn.

Moody's expects that pricing cuts in key corridors in the core money transfer business will result in revenue declines of low-to-mid single digits in 2013. The lack of organic revenue growth until 2014 at the earliest is likely to result in the continuation of a more aggressive financial philosophy, which would be a departure from the company's historically disciplined financial policies.

Moody's believes that Western Union's core money transfer business is in a state of flux given competitive pricing pressures and emerging payment technologies. Significant investment, possibly in the form of higher R&D or acquisition activity, may be required to maintain or expand Western Union's market position. In addition to price reductions, near term profitability will likely be hampered by compliance charges, customer acquisition and product development costs.

To the extent that revenue growth potential remains elusive, Moody's believes that Western Union could be pressured to return more capital back to shareholders. Already, Western Union has upsized its buyback capacity to about $750 million through the end of 2013, while increasing annual dividend payments to about $300 million. These shareholder friendly actions combined with pricing pressure point to the increasing possibility of higher debt to EBITDA (mid to high 2x range) over the next few years, which is in line with companies rated in the Baa category.

The negative outlook reflects Moody's view that Western Union will be challenged to restore revenue and profit growth by 2014. Western Union will be engaging in price cuts to boost transaction volumes in an industry that is otherwise showing significant growth -- e.g., Moody's projects global remittances to developing countries will grow in mid-to-high single digits over the next several years. This diverging trend may reflect competitive pressures from other global and regional money transfer companies, as well as from alternative payment methods.

The negative outlook also considers Western Union's evolving business model as the company seeks to diversify its revenue stream while investing in new payment technologies. With the lack of organic revenue growth, Moody's believes the risk heightens for further sizable share repurchase or acquisition activity, which could weaken the credit profile.

The Baa1 rating could be downgraded if we expect financial leverage to increase such that adjusted debt to EBITDA were to approach the high 2 times range on a sustained basis or cash flow from operations to debt were to fall below 30%, the company were to lose market share, organic revenue growth were to decline over the long term, or the outlook for industry regulation were to become materially adverse. A more aggressive financial policy including share buybacks, acquisitions and dividend payouts such that a substantial amount of debt is raised could pressure the rating.

To stabilize the rating outlook, Moody's will assess Western Union's progress in enhancing its overall financial flexibility. Measures would include revenue and profit growth, adjusted debt to EBITDA in the low to mid 2 times level, improving operating margin to above 25% on a sustained basis, cash flow from operations to debt greater than 30%, and a cash balance above $1.4 billion.

The principal methodology used in rating Western Union Company was the Global Business and Consumer Service Industry Rating Methodology, published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Stephen Sohn
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Western Union's rating to Baa1; outlook negative
No Related Data.

 

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