$3.4 billion of debt downgraded
New York, April 16, 2020 -- Moody's Investors Service ("Moody's") downgraded
Equifax Inc.'s ("Equifax") senior unsecured rating
to Baa2 from Baa1. The short term rating was affirmed at Prime-2.
The rating outlook was revised to stable from negative.
RATINGS RATIONALE
"Moody's expects Equifax's free cash flow will remain
weak in 2020 due to elevated information technology spending and economic
headwinds, limiting Equifax's ability to reduce financial
leverage and leading to the ratings downgrade," said Edmond
DeForest, Moody's Vice President and Senior Credit Officer.
The Baa2 senior unsecured rating reflects Moody's expectations that
Equifax will maintain debt to EBITDA around 3 times and good liquidity
while it completes its information technology transformation. Equifax's
credit profile benefits from its leading market position as one of the
three consumer credit reporting agencies in the US and high barriers to
entry in the credit bureau business. However, Equifax has
smaller revenue scale, narrower geographic scope and weaker credit
metrics than UK-based Experian plc (parent of Experian Finance
plc, Baa1 stable). Equifax has moderate operating scale and
a significant portion of its revenues are correlated to US macroeconomic
cycles.
All financial metrics cited reflect Moody's standard adjustments.
Moody's also adds back to EBITDA costs associated with cybersecurity
expenses stemming from the 2017 data breach, which benefits financial
leverage metrics. Those costs were in excess of $1 billion
in 2019 and are anticipated to be more than $250 million in 2020.
In addition, Equifax capitalizes software development costs of about
$300 million per year. If EBITDA is reduced by those capitalized
software costs, financial leverage for the fiscal 2019 was about
4.0 times.
Equifax's consumer credit information and employment and income
verification services are sold on a subscription and transactional basis
and are deeply integrated into its customers' decision processes.
Therefore, Moody's considers the company's revenue stable
and predictable. However, the rapid and widening spread of
the COVID-19 pandemic, a deteriorating global economic outlook,
falling oil prices and asset price declines are creating a severe and
extensive economic shock across many sectors, regions and markets.
As a result, Moody's anticipates a weak operating environment
during 2020 in the consumer finance sectors where Equifax's customers
compete. The combined credit effects of these developments are
unprecedented and could lead Equifax's revenue to decline and its
profit margins to contract in 2020, slowing the pace of leverage
reduction and pressuring free cash flow. A return to substantial
organic revenue growth and profit margin expansion in the second half
of 2020 may be dependent upon improvement in U.S. consumer
and mortgage credit lending market conditions, which are uncertain.
Since Equifax is a data, analytics and software provider,
it does not exhibit material or unusual environmental or social risks.
That said, Moody's regards the COVID-19 pandemic as
a social risk under its ESG framework, given the substantial implications
for public health and safety. Equifax's critical role in
consumer finance, its possession of large amounts of private consumer
data and the lingering damage to its reputation from the 2017 data breach
leave it exposed to high regulatory and information security risks,
which are considered governance and social considerations under Moody's
ESG framework. Additional governance considerations include Equifax's
financial strategies, which Moody's considers balanced and predictable.
However, Moody's anticipates Equifax may return to debt-financed
acquisitions and share repurchase activity in 2021 after it refinances
its maturing debt and concludes technology transformation investments
and funding its remaining consumer class action and legal settlement obligations.
Equifax's Prime-2 short term rating reflects Moody's expectation
for good liquidity over the next 12 to 15 months. At March 31,
2020, Equifax had $370 million of cash. Free cash
flow in 2020 and 2021 will be limited by elevated technology infrastructure
investments that should continue in 2020 and at lower levels in 2021 and
payments related to legal and consumer class action settlements arising
from the 2017 data breach.
As of March 31, 2020, the company had a combined $1.2
billion available under its $1.1 billion revolving line
of credit, which matures in September 2023, and $225
million accounts receivables-backed credit facility expiring in
December 2022. The company's $1.1 billion commercial
paper program is fully backstopped by the revolving credit facility;
there was no commercial paper outstanding as of December 31, 2019.
The ability to borrow under the revolving line of credit is conditioned
by, among other things, compliance with a maximum leverage
ratio test (as defined in the agreement) of less than 4.5 times
beginning with the period ending June 30, 2020, stepping down
to 4.0 times for the period ending December 31, 2021 and
to 3.5 times for the period ending March 31, 2022 and thereafter.
Moody's expects Equifax will maintain an ample operating cushion
under the covenant.
The company has large debt maturities of $500 million in June 2021
and $600 million in August 2021. In addition, Moody's
expects over $400 million of consumer class action fund and legal
settlement payments must be made in the next 12 to 18 months. Moody's
also expects Equifax will spend about $350 million annually on
capital expenditures (mostly capitalized software costs) and continue
to pay a regular cash dividend to shareholders of about $190 million
a year. Moody's anticipates Equifax will use its cash from
operations, cash, credit facilities and access to the capital
markets to finance these investments and payments.
The stable outlook reflects Moody's expectations for diminished
technology infrastructure investment after 2020, a return to revenue
growth and profit rate expansion in 2021 and debt to EBITDA around 3 times.
The outlook also anticipates that Equifax will address its looming debt
maturities well in advance of the 2021 maturity dates. The outlook
further reflects Moody's expectation that Equifax may engage in
debt-financed acquisitions and share repurchase activity after
debt maturities have been addressed, technology transformation investments
have declined and funding of its remaining consumer class action and legal
settlement obligations have concluded.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Moody's expects Equifax will maintain
1) sustained revenue and earnings growth, 2) debt to EBITDA around
2.5 times, 3) retained cash flow to debt above 25%
and 4) a conservative financial risk profile featuring limited debt-financed
acquisition and share repurchase activity.
Moody's could downgrade Equifax's ratings if 1) revenue and
profits do not grow, 2) the cost or time required to conclude the
company's digital transformation increases, 3) debt to EBITDA
remains around 3.5 times or 4) there is a shift toward more aggressive
financial policies.
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.
Moody's took the following rating actions and made the following outlook
revision:
..Issuer: Equifax Inc.
....Senior Unsecured Commercial Paper,
Affirmed Prime-2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
....Outlook, Changed To Stable From
Negative
Equifax Inc. (NYSE: EFX) is based in Atlanta, GA and
provides information solutions, employment and income verifications
and human resources business process outsourcing services. In addition
to the US (about 70% of revenues), Equifax operates in Canada,
Asia Pacific, Europe and Latin America, and through a joint
venture in Russia. Moody's expects 2020 revenue of approximately
$3.5 billion.
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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if applicable to jurisdiction: Ancillary Services, Disclosure
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.
Further information on the EU endorsement status and on the Moody's
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Edmond DeForest
VP - Senior Credit Officer
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
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