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Rating Action:

Moody's downgrades Pitney Bowes (sr. unsec. to Baa1, short-term to P-2); outlook stable

Global Credit Research - 23 Apr 2012

Approximately $4.2 billion of debt securities affected

New York, April 23, 2012 -- Moody's Investors Service has downgraded all of the debt ratings of Pitney Bowes Inc. ("Pitney Bowes"), including the senior unsecured rating to Baa1 from A2 and its short-term rating to Prime-2 from Prime-1. This concludes the review initiated on March 15, 2012. The rating outlook is stable.

RATINGS RATIONALE

"The revised ratings reflect our expectation that Pitney Bowes' business and credit profile will be challenged over the intermediate term due to the ongoing secular decline in traditional mail delivery, as well as our expectation for worsening mail volume trends and increasing competition from alternative web-based providers," said Moody's Vice President Gregory Fraser. Given the continued erosion in core mailing and production mail volumes (i.e., postal meter and production mail equipment installed bases), we also believe Pitney Bowes could target acquisitions to offset revenue decline in the core business units and supplement its organic growth initiatives in digital hybrid, cloud-based and software offerings.

Pitney Bowes' new initiatives are slowly gaining traction and will initially have lower relative margins, which means they are not yet profitable enough to offset the legacy business decline. Though past acquisitions have been modest and funded with internal cash, future acquisitions will likely be larger and debt-financed. "At the Baa1 rating, Pitney Bowes has some flexibility to continue the transition of its business model to restore growth via external means, if necessary, while also contending with rising competitive challenges," said Fraser.

As a result of these challenges, we expect Pitney Bowes' operating margins will decline to the 14% to 15% range (from 15.4% at December 2011) and debt to EBITDA will rise to the 3x to 3.5x range (from 2.7x) on a Moody's adjusted basis. These metrics are within the range for other Baa1-rated cross industry peers (i.e., median operating margin of 18.5% and debt to EBITDA of 3x).

..Ratings downgraded include:

Pitney Bowes Inc.

Senior Unsecured Rating to Baa1 from A2

Senior Unsecured Shelf Rating to (P)Baa1 from (P)A2

Subordinate Shelf Rating to (P)Baa2 from (P)A3

Preferred Shelf Rating to (P)Baa3 from (P)Baa1

Commercial Paper Rating to P-2 from P-1

Pitney Bowes International Holdings, Inc.

Preferred Stock Rating to Baa3 from Baa1

Despite our expectation for continued erosion of its key markets, we believe Pitney Bowes will maintain leadership positions in its core mailing and production mail businesses. We also expect the company to benefit from cost reduction and restructuring efforts, and experience some modest equipment revenue growth due to a mix shift to enterprise products and increased backbone services for a downsized United States Postal Service. Further, revenue and earnings are expected to remain highly visible given that about 80% of revenue is derived from recurring sources that provide some resiliency.

Pitney Bowes maintains good liquidity with the expectation of free cash flow in the range of $150 to $200 million (down from an average of about $400 million over the last 5 years), cash balances of at least $300 million (cash and equivalents were $869 million as of December 2011), and full access to a $1.25 billion committed bank facility maturing May 2013 (likely to be extended). During the fourth quarter of 2012, $550 of long term debt is scheduled to mature, which we expect Pitney Bowes to repay through a combination of refinancing and domestic cash.

The stable rating outlook reflects our expectation that over the intermediate term Pitney Bowes will generate good profitability and cash flow despite the challenges of transforming its business model, growing its revenue base and reversing the decline in profitability. The outlook also reflects our expectations that Pitney Bowes will continue to invest in its business and that acquisitions may increase in number and size.

Over time with continued pressure from the secular and competitive challenges, ratings could be downgraded if: (i) Pitney Bowes' adjusted operating margins fell near or below 13%; (ii) adjusted debt to EBITDA was sustained above 3.5x; (iii) the company cannot reverse the trend of revenue and profit declines; or (iv) Pitney Bowes makes acquisitions that could signal the need to pursue growth through meaningful external investment. Ratings could be raised if Pitney Bowes: (i) demonstrates steady organic revenue growth; (ii) sustains adjusted operating margins above 16%; and (iii) adheres to its conservative financial practices which include maintaining good liquidity and a moderately leveraged balance sheet such that adjusted debt to EBITDA is expected to be sustained below 2.5x.

Moody's subscribers can find additional information in the Pitney Bowes Credit Opinion published on www.moodys.com.

The principal methodology used in rating Pitney Bowes was the Global Technology Hardware Rating Methodology published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

With headquarters in Stamford, Connecticut, Pitney Bowes is a leading global provider of integrated mail, messaging and document management solutions that includes postage meters, mailing equipment and related document messaging services and software, mail and marketing services. Revenue was $5.3 billion in 2011.

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, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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.

Gregory A. Fraser
Vice President - Senior Analyst
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 Pitney Bowes (sr. unsec. to Baa1, short-term to P-2); outlook stable
No Related Data.

 

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