New York, June 01, 2020 -- Moody's Investors Service ("Moody's) affirmed Automatic
Data Processing, Inc.'s ("ADP") long term
senior unsecured debt rating at Aa3, long term issuer rating at
Aa3, and short-term commercial paper rating at Prime-1.
The outlook was revised to negative from stable. The outlook revision
reflects Moody's expectation of a meaningful near term contraction
in ADP's operating performance following the coronavirus outbreak
and the resulting highly elevated unemployment levels in the company's
target markets, especially in the small and medium-sized
business ("SMB") segments, as well as a significant drop in float
related investment income stemming from a recent sharp decline in interest
rates.
Moody's took the following rating actions:
Long-term Issuer Ratings, Affirm Aa3
Senior Unsecured Notes due September 2020, Affirm Aa3
Senior Unsecured Notes due September 2025, Affirm Aa3
Short-term Commercial Paper Rating, Affirm P-1
Outlook action: Outlook revised to negative from stable
RATINGS RATIONALE
ADP's Aa3 long-term rating is supported by the company's
leading position in outsourced human capital management services,
healthy long term growth prospects, low adjusted gross debt leverage
of less than 1x, as well as relatively predictable profitability
and cash flow derived from a diverse group of customers. The rating
is also bolstered by the quality of ADP's management team which
has demonstrated a solid track record in recent years for achieving stated
operating performance targets and the company's largely independent
board of directors which limits corporate governance concerns.
Despite the company's strong market position, Moody's
considers ongoing competitive pressures on ADP's business,
including possible disruptions associated with new technologies,
which may increasingly weigh on ADP's credit quality. The
company's credit rating also considers ADP's exposure to economic
cyclicality with respect to employment levels and interest rate volatility
as well as shifting structural trends and work arrangements within the
company's markets.
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and asset price volatility
are creating a severe and extensive credit shock across many sectors,
regions and markets. The combined credit effects of these developments
are unprecedented. The Human Capital Management sector has been
significantly affected by the shock given its sensitivity to consumer
demand and sentiment. More specifically, the weaknesses in
ADP's credit profile, including its exposure to rising unemployment,
particularly in the U.S., have left it vulnerable
to shifts in market sentiment in these unprecedented operating conditions
and ADP remains vulnerable to the outbreak continuing to spread.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
Today's action reflects the impact on ADP of the breadth and severity
of the shock, and the broad deterioration in credit quality it has
triggered.
Additional risks to the issuer's credit quality include ADP's
smaller scale relative to its rated peer group, service line concentration,
limited geographic diversity, historical focus on acquisitions and
shareholder returns, and potential reputational risk in the event
of a data security or customer privacy breach of the company's systems.
ADP's Prime-1 short-term rating reflects its robust liquidity
from Moody's expectations of healthy, albeit softening,
free cash flow generation (estimated at 15% of debt in FY21),
substantial cash-on-hand, and external liquidity consisting
of $10.3 billion in bank facilities. ADP uses commercial
paper primarily to meet short-term funding requirements related
to its client funds obligations, and the company does not roll over
commercial paper notes beyond their usual 1-2 day maturities.
Sources for the repayment of the commercial paper issues are client funds
inflows or liquidations of the short-term portion of the client
funds' investment portfolio. As of March 31, 2020,
ADP had available cash (excluding short-term marketable securities)
of approximately $1.7 billion, the majority of which
is located in the US. ADP maintains several revolving credit facilities
including: a $3.8 billion 364-day facility
expiring June 2020, with a one-year term out option,
and a $2.75 billion facility expiring June 2024, and
a $3.75 billion expiring June 2023, bringing total
external liquidity sources to $10.3 billion. All
three facilities have same day availability, no financial covenants
and do not require a material adverse change (MAC) representation for
draw-downs. ADP had full access to all three facilities
as of March 31, 2020. In terms of alternate liquidity,
ADP also has the ability to borrow on a secured basis through its US,
UK, and Canadian short-term reverse repurchase agreements,
which are collateralized principally by government and government agency
securities in the Client Funds Portfolio with maturities up to 5 days.
The negative rating outlook reflects Moody's expectation that ADP's
revenues will contract (on an organic basis) at a mid to high single digit
rate in FY21 (ending June) with more significant declines in EBITDA during
this period. Despite this contraction, debt/EBITDA (Moody's
adjusted) is expected to remain below 1x. The outlook could be
revised to stable if ADP demonstrates stronger than expected operating
performance trends, particularly with respect to profitability levels
and free cash flow generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Based on ADP's current business profile, a rating upgrade
is unlikely over the near term. Over the long term, a rating
upgrade is possible if ADP demonstrates enhanced business diversification
and scale while also more clearly articulating and maintaining a commitment
to a highly conservative financial strategy.
The ratings could be downgraded if ADP's operations experience client
attrition and market share erosion, particularly within the SMB
market, sustained margin compression, increased revenue concentration,
or if ADP shifts to more aggressive financial strategies.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
ADP, headquartered in Roseland, New Jersey, is a worldwide
provider of outsourced human resources, payroll, tax,
and benefits administration. Moody's expects ADP to generate
more than $13.5 billion in revenue in FY21 (approximately
$11 billion net of pass throughs).
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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for additional regulatory disclosures for each credit rating.
Lee Zeltser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
