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Rating Action:

Moody's assigns first-time B3 CFR to Thomson Reuters' Financial & Risk unit (Financial & Risk US Holdings, Inc.); rates new sr sec credit facilities and sr sec notes B2, sr unsec notes Caa2; outlook stable

05 Sep 2018

Approximately $14.25 billion of new debt rated

New York, September 05, 2018 -- Moody's Investors Service ("Moody's") assigned a first-time B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to Financial & Risk US Holdings, Inc. (the "company" or "Refinitiv", which will be renamed and d/b/a "Refinitiv US Holdings Inc." upon transaction closing), a US-based second-tier holding company that will own the assets of Thomson Reuters Corporation's (Baa2 review for downgrade) Financial & Risk (F&R) unit. In connection with this rating action, Moody's assigned a B2 rating to Refinitiv's proposed senior secured credit facilities, B2 rating to the proposed senior secured notes and Caa2 rating to the proposed senior unsecured notes. The rating outlook is stable.

Thomson Reuters Corporation's ("TRI" or the "parent") plans to carve out F&R, its largest division comprising the financial information, analysis and risk businesses. The parent will retain a 45% ownership interest in the company while private equity funds managed by The Blackstone Group, CPP Investment Board (CPPIB) and GIC (collectively the "Blackstone Consortium" or "sponsors") will purchase 55% of the company via a leveraged buyout (LBO) valuing F&R at approximately $20 billion. Proceeds from the issuance of $13.5 billion of US dollar denominated and euro denominated debt plus $3.025 billion of cash equity from the Blackstone Consortium, $2.475 billion of rollover equity from TRI and $1 billion of perpetual PIK preferred equity (with a 14.5% annual dividend) will be used to finance the transaction plus estimated transaction fees, expenses and opening cash to Refinitiv's balance sheet. Following the 55% majority stake sale, TRI will receive gross cash proceeds in the form of a dividend totaling approximately $17 billion (subject to purchase price adjustments) from Refinitiv.

Following is a summary of today's rating actions:

Ratings Assigned:

...Issuer: Financial & Risk US Holdings, Inc.

.....Corporate Family Rating -- B3

.Probability of Default Rating -- B3-PD

.$ 750 Million Senior Secured Revolving Credit Facility due 2023 -- B2 (LGD3)

.$5,500 Million Senior Secured Term Loan B (USD) due 2025 -- B2 (LGD3)

.$2,500 Million Senior Secured Term Loan B (EUR) due 2025 -- B2 (LGD3)

.Up to $2,000 Million Senior Secured Notes (USD) due 2026 -- B2 (LGD3)

.Up to $1,000 Million Senior Secured Notes (EUR) due 2026 -- B2 (LGD3)

.Up to $1,800 Million Senior Unsecured Notes (USD) due 2026 -- Caa2 (LGD6)

.Up to $ 700 Million Senior Unsecured Notes (EUR) due 2026 -- Caa2 (LGD6)

Outlook Actions:

.....Outlook, Stable

The assigned ratings are subject to review of final documentation and no material change to the size, terms and conditions of the transaction as advised to Moody's.

RATINGS RATIONALE

The B3 CFR reflects Refinitiv's: (i) elevated pro forma financial leverage; (ii) competitive challenges that historically produced flat to low-single digit organic revenue growth; (iii) debt-heavy balance sheet at a time when business risk is increasing; (iv) and limited EBITDA growth prospects near-term. The B3 rating also considers Refinitiv's: (i) leading global market positions across its financial information, analysis and risk market segments; (ii) meaningful recurring revenue base; (iii) relatively high customer retention levels; and (iv) good geographic diversity. The rating also takes into account minimal execution risk to the cost savings plan offset by near-term costs to achieve future savings.

Pro forma total debt to EBITDA of approximately 7.6x on a GAAP basis as of 30 June 2018 (incorporating Moody's standard and non-standard adjustments that exclude certain one-time expenses and non-recurring costs to normalize EBITDA) or 7.2x pro forma on a non-GAAP basis (Moody's adjusted, including our estimate for net cost savings to be realized in the first year after transaction close) is high for the rating category compared to median leverage of 6.6x for B3-rated issuers. Nevertheless, we believe the business model can accommodate a more leveraged capital structure due to Refinitiv's good revenue visibility, solid EBITDA margins and our expectation for positive free cash flow generation.

The rating reflects the historical sub-par organic revenue growth that ranged from -1% to +1% compared to Refinitiv's principal competitors who consistently produced higher organic revenue growth in the 5-10% range. Refinitiv's growth has been impacted by pricing pressures from European bank customers' cost reduction measures and retrenchment, the rise of passive investing at the expense of active investing and a fast evolving technology landscape prompting clients to increasingly transition to lower-cost cloud based applications. Refinitiv's EBITDA margins are below peers, suggesting the absence of pricing power and limited ability to achieve meaningful share gains.

Moody's believes the parent's historical capital allocation strategy resulted in Refinitiv's under-investment in new industry-leading products relative to peers and late entry into or absence from growing market segments. This caused Refinitiv to fall behind and experience market share losses to competitors who invested much earlier in technology and product innovation. We expect Blackstone will help facilitate better investment allocation and focus, however we believe Refinitiv will trail its competitors for at least the foreseeable future. Moreover, the sizable debt load and interest expense burden will constrain Refinitiv's ability to make R&D investments comparable to peers, in our opinion. Targeted growth areas include data platform (cloud-enabled non-real-time data), venues & transactions (wealth management and brokerage processing solutions) and risk (know-your-customer as a service). While the data platform unit is sizable and growing in the mid-single digits, growth is offset by continuing weakness in desktops. Further, venues & transactions and risk collectively account for only 22% of revenue and we do not project growth in these areas to meaningfully contribute to companywide growth over the rating horizon given the need to invest in and develop next generation products and services to upsell to clients.

The rating is further constrained by increasing competitive challenges from industry players amassing scale via consolidation and entrants offering new technology solutions and niche content, that have gradually chipped away at Refinitiv's number one and number two market positions. According to Moody's analysis, Refinitiv has lost share in desktops (Eikon), data platform and electronic trading. The desktop business, which represents around 36% of Refinitiv's revenue (albeit declining), is susceptible to economic downturns as clients are more likely to reduce their Eikon terminal count or renew subscriptions at lower price points due to budget constraints. We also note Refinitiv's transaction-based business (~17% of revenue) is dependent on capital markets activity and can fluctuate from quarter to quarter between positive and negative growth, influencing Refinitiv's overall organic revenue growth rates.

Moody's understands that Refinitiv's new owners have developed a robust cost reduction strategy. We note that the full impact of planned cost synergies is not instantaneous, requiring up to three years for full realization. One-time cumulative carve-out costs to achieve future cost savings will be sizable and nearly offset realized savings over the near-term, thus impacting EBITDA growth and Refinitiv's ability to de-lever swiftly over the rating horizon.

Since the $8 billion in term loans will be structured with 1% annual amortization and an excess cash flow sweep that first becomes applicable in fiscal 2020, near-term de-leveraging via meaningful debt reduction is unlikely. As such, Refinitiv will need growth to de-lever. However, we expect growth prospects over the short-term to be lackluster due to the absence of focused investment in prior years. Further, well-intended R&D investments and M&A under Blackstone's stewardship will consume cash flow and require several years to produce organic revenue growth comparable to peers.

The rating further reflects the substantial intangible assets following the company's separation and LBO, and lack of operating history as a standalone entity. It also captures event risks, such as M&A or a potential dividend recapitalization (though negligible over the near-term) related to ownership by its sponsors.

Support for the B3 rating is bolstered by Refinitiv's leading global market positions across its financial information, analysis and risk market segments, where it maintains #1 or #2 market positions. This includes #1 positions in real-time data, non-real-time financial data, FX dealer-to-client (D2C) trading, fixed income D2C trading via its 54% owned Tradeweb platform and risk solutions; and #2 positions in desktop services, FX dealer-to-dealer trading and brokerage processing solutions.

The B3 CFR also considers Refinitiv's good revenue visibility arising from a high percentage of subscription-based recurring revenue (~85% of total) and relatively high customer retention rates at ~89% (~93% for top 32 accounts). According to management, 100% of relationships have been retained over the past five years with customers spending $6 million or more per annum. Good geographic diversification is also reflected in the B3 rating (Americas -- 41%, EMEA -- 40% and Asia-Pacific -- 19%) combined with good customer diversification (no single customer accounts for more than 3% of revenue; top 25 customers account for 27% of revenue). Increasing buy-side penetration (~44% of revenue compared to 37% in 2012) and growth in the data platform business, which is integrated into financial institutions' systems and work flows, have created a loyal customer base.

Refinitiv's Eikon per terminal cost is lower than Bloomberg's, however this is likely due to its less extensive data sets and analytical features, in Moody's opinion. Eikon "lite" offers lower price points for specific use cases, allowing Refinitiv to compete against lower-priced players like Money.net, retain customers and provide opportunities to upsell new services and products.

An additional positive attribute includes current EBITDA margins in the 28-31% range (Moody's adjusted) with visible margin improvement expected through cost savings. The sponsors are stepping into an existing strategic plan that they have refined and enhanced with minimal execution risk to Refinitiv's $650 million cost saving program, which will target previously identified operational improvements. Cumulative cost savings of $315 million are expected to be achieved in the first year after transaction close given that affected cost areas have been fully scoped out and execution is already underway. Management believes it can reduce centralized corporate expenses from nearly $2 billion/annum that TRI currently allocates to F&R, to $1.7 billion/annum. We also note the Transition Services Agreement (TSA) with the parent should be a net cash flow benefit to Refinitiv, a credit positive.

We believe that Blackstone's scale across its numerous portfolio companies will enable Refinitiv to negotiate better vendor pricing and help reduce capex by approximately $70 million/annum. Because Blackstone, CPPIB and GIC are key participants in the financial community, Refinitiv's management team believes it will be able to leverage relationships with major exchanges and accelerate sales to sell-side clients and hedge funds. Management also believes Blackstone can help accelerate revenue growth and margin expansion via restructuring programs that include technology optimization, product improvements, go-to-market optimization and alternative data offerings that cater to investors' growing demand for unique data sources.

Despite a sizable interest expense burden, positive free cash flow generation and good liquidity are expected (cash distributions to the sponsors are not planned), supported by access to a $750 million revolver. We project free cash flow to adjusted debt of roughly 2.5% in 2019 and 4% in 2020. While there is an ability to voluntarily reduce debt with free cash flow, the company faces the need to quickly deploy cash resources towards growth areas and M&A in order to remain relevant in a rapidly changing industry that is increasingly technology driven and more competitive.

Other Considerations

Financial & Risk (Cayman) Parent Ltd. will be the audited entity issuing future annual and quarterly financial statements and will guarantee the debt issued by Financial & Risk US Holdings, Inc. The $13.5 billion of external debt issued by Financial & Risk US Holdings, Inc. will be on-lent internally to several Refinitiv subsidiaries via numerous inter-company debt obligations to acquire TRI's intellectual property, assets and subsidiaries under terms, rates and tenors closely matching the external debt.

Rating Outlook

In view of the high leverage, the stable rating outlook reflects our expectation that Refinitiv will experience modest organic revenue growth and timely execute its current restructuring plan, with a focus on reducing operating costs to drive EBITDA and margins higher thus decreasing financial leverage to 6.8x on a GAAP basis (or 6.5x on a non-GAAP basis) by year end 2020 based on our projections, barring additional debt incurrence. The stable outlook also embeds our view that Refinitiv will cultivate more focused capital spending, R&D and go-to-market strategies under new ownership to maintain stable customer relationships with the potential for deeper penetration into existing accounts and new client wins over the long term.

What Could Change the Rating - Up

Ratings could be upgraded if Refinitiv demonstrates sustained organic revenue growth in the mid-single digit range and EBITDA expansion that leads to consistent and growing free cash flow generation of at least 4% of total debt (Moody's adjusted) and a sustained reduction in total debt to EBITDA leverage on a GAAP basis to a level approaching 6x (Moody's adjusted). Refinitiv would also need to exhibit prudent financial policies and a good liquidity position to be considered for an upgrade.

What Could Change the Rating - Down

Ratings could be downgraded if Refinitiv's total debt to EBITDA leverage on a GAAP basis is expected to be sustained above 8x (Moody's adjusted) or free cash flow were to be sustained below 1% of total debt (Moody's adjusted). Ratings pressure could also occur if the company is unable to achieve standalone cost savings in a timely manner, market share erodes, liquidity deteriorates, Refinitiv experiences sustained client losses or the company engages in debt-financed acquisitions or shareholder distributions resulting in leverage sustained above our downgrade threshold.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

With corporate offices in New York, NY, and London, UK, Financial & Risk US Holdings, Inc. (to be renamed "Refinitiv US Holdings Inc." upon transaction closing) is a US-based holding company that will own the assets of Thomson Reuters Corporation's ("TRI") Financial & Risk unit following its carve-out and subsequent sale of a 55% majority stake to The Blackstone Group, CPP Investment Board and GIC. TRI will continue to own 45% of Refinitiv. The company provides financial information, security pricing, analytics, risk management and compliance support tools that enable financial market professionals to conduct research, perform pricing and valuation, execute transactions and address third-party risk. Pro forma revenue totaled $6.2 billion for the twelve months ended 30 June 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory A. Fraser, CFA
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

John Diaz
MD - Corporate Finance
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

No Related Data.
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