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
