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Fitch Rates Moody's Senior Unsecured Note Offering 'BBB+'; Outlook Stable
June 1, 2017 / 2:11 PM / 6 months ago

Fitch Rates Moody's Senior Unsecured Note Offering 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 01 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to Moody's Corporation's (MCO) benchmark sized senior unsecured notes. The Rating Outlook is Stable. Proceeds are to be used to fund a portion of the EUR3 billion (approximately $3.36 billion) purchase price of Bureau van Dijk (BvD). Fitch currently rates MCO 'BBB+'. Approximately $4.1 billion of debt was outstanding as of March 31, 2016. A full list of ratings follows at the end of this release. Fitch views the acquisition of BvD positively, despite the full multiple being paid, since BvD enhances Moody's Analytics (MA) business. It provides the company with direct ownership of the attractive BvD franchise and access to BvD's comprehensive database of private company information which can be bundled with MA existing product sets. As a provider of private company data and information, BvD experienced a 9.3% 10-year revenue compound annual growth rate (CAGR) through fiscal year (FY) 2016 and increased its EBITDA margin from 38% in FY2006 to 51% in FY2016. BvD also increases the percentage of MA's revenues from recurring subscription revenues to 78% from 75%. Finally, it diversifies MA's customer base, reducing MA's concentration to financial institutions from 88% of existing customers to 78% of pro forma customers, as 72% of BvD's customer base is comprised of corporates, business services and public agencies. Following the BvD acquisition announcement, management restated their commitment to maintaining their 'BBB+' rating. This is corroborated by the significant amount of offshore cash-on-hand and pre-payable debt that is expected to be used to finance the acquisition. In addition, MCO will be reducing share buybacks to approximately $200 million in 2017 and 2018 (sufficient to offset employee stock plan dilution) and will use the excess cash to prepay debt. Fitch expects pro forma total unadjusted gross leverage will increase to 3.0x at closing, trend down to 2.6x by year-end 2018 and be below Fitch's 2.5x negative trigger within 18-24 months of the transaction's close. At March 31, 2017, Fitch calculated Moody's unadjusted gross leverage as of the latest 12 months (LTM) ended March 31, 2017 at 2.3x. On May 15, 2017, MCO announced the acquisition of BvD for EUR3 billion (approximately $3.28 billion), or 22.7x BvD's fiscal year ended (FYE) Dec. 31, 2016 EBITDA of EUR132 million. MCO intends to finance approximately 70% of the acquisition with a mix of offshore cash-on-hand and short term pre-payable debt, allowing the company to return total unadjusted gross leverage to below Fitch's 2.5x negative trigger within 18-24 months of the transaction's close. The balance of the acquisition's price is to be funded with these new senior notes. KEY RATING DRIVERS High Barriers to Entry: MCO's rating segment (Moody's Investors Service; MIS) operates with limited competitive threats as a leading Credit Rating Agency (CRA) with a meaningful and defensible share of the global ratings business. The global scale, significant infrastructure required to comply with increasing regulatory standards and long history of investor acceptance serve as impediments to new entrants. Fitch views brand, reputation, and existing coverage as self-reinforcing and generally a prerequisite to win new businesses, creating challenges for other CRAs outside the largest three agencies competing at the regional geographic and niche product levels. Entrenched Role of NRSROs: Nationally Recognized Statistical Rating Organizations' (NRSRO) ratings are codified within a number of federal and state regulations and statutes and are a critical element for asset managers and financial institutions to meet a variety of legal and regulatory requirements. Dodd Frank removed references to NRSROs in certain regulations in order to reduce the reliance and the required use of NRSROs' credit ratings. However, Fitch believes financial market participants will continue to rely on credit ratings given the absence of viable alternatives. Fitch also believes NRSROs will remain favored by investors compared to unregistered agencies given the more stringent oversight and compliance necessary to meet NRSRO requirements. Diversification: MCO's MIS segment is dependent on both dollar volume and number of ratable debt issues, which tend to be closely linked to the health of the major economies as well as government fiscal and monetary policies. MIS generates recurring contractual annual fees to monitor existing ratings, mitigating the more volatile fees from new issuance. For FY2016, approximately 39% of MIS's reported revenue was recurring. MCO's analytics segment (Moody's Analytics; MA) accounted for 34% of MCO's total revenues, with 75% of MA's sales comprised of recurring revenue. Conservative Leverage: MCO continues to target solid investment-grade ratings and historically has maintained Fitch-calculated unadjusted gross leverage around 2x. As of the LTM ended March 31, 2017, Fitch-calculated leverage was 2.3x. There is flexibility to exceed the 2.5x target within the current rating to accommodate the BvD acquisition, as Fitch believes MCO can delever within 18-24 months given its free cash flow (FCF) generation. While EBITDA margin and FCF generation could support slightly more leverage at the current rating, the regulatory and litigation event risk (discussed below) weighs upon the rating's leverage tolerance. Share Repurchase and Dividends Growing: Management expects to complete approximately $200 million in share repurchases in 2017 and 2018 which should be sufficient to offset employee stock plan dilution. Dividends have consistently grown at a five-year CAGR of 19% through 2016. Absent large acquisition activity, Fitch expects FCF will continue to be dedicated toward shareholder returns. In addition, once leverage is returned to below the 2.5x negative threshold, Fitch believes management will issue debt to support its future capital allocation strategy to the extent leverage remains within the 2x-2.5x range. Regulatory and Litigation Uncertainty: The ratings recognize potential overhangs on MCO's credit profile, namely regulatory and litigation-related uncertainties. Fitch believes MCO carries a meaningful level of liquidity, providing financial flexibility to address regulatory and/or litigation risk. In addition, given the time it takes for legal and regulatory matters to be processed (cases can take years before a settlement may be reached), MCO can preserve additional liquidity if it believes a case may result in a material cash payment. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include: --The base case reflects Moody's 2017 revenue guidance, which Fitch believes is achievable. Fitch assumes slower growth going forward, assuming transaction revenues slow down with non-transaction revenues growing modestly mid-single digits. --EBITDA margin of 46% in 2017-2020, reflecting declines in issuance in MIS moderated by margin improvements in its MA segment. --Fitch anticipates MCO's total debt increases by $2.2 billion at Dec. 31, 2017 driven by debt issuance for the BvD acquisition, debt issuance of $800 million in February 2017, debt repayment of $300 million in 1Q 2017, and the use of FCF to prepay debt. --Share repurchases of $200 million in 2017 and 2018. Beyond 2018, Fitch assumes that FCF is primarily dedicated towards share repurchases. --Fitch assumes all debt maturities are refinanced. RATING SENSITIVITIES Positive: Given the regulatory and litigation risk overhang, Fitch does not expect any positive near-term rating momentum. Fitch would consider an upgrade in the absence of material litigation or regulatory overhang, diversification increasing from MA's subscription revenue growth, and a stated commitment to a leverage target below 1.5x. Negative: Future developments that may, individually or collectively, lead to a negative rating action: --Acceleration of regulatory and litigation-related event risks combined with material operating or financial metric deterioration; --Monetary penalties or settlements that drove leverage over 2.5x and Fitch believed such elevated leverage levels would be maintained; --Any debt financing transaction that drove unadjusted gross leverage over 2.5x, without the expectation of delevering below 2.5x within 18 to 24 months. LIQUIDITY MCO's liquidity is strong and supported by approximately $360 million of readily available cash and short-term investments as of March 31, 2017 per Fitch's estimates, $1 billion in revolving credit facilities ($786 million available as of March 31, 2017) and expected FCF generation. MCO's revolver provides liquidity backup to its $1 billion CP program ($214 million outstanding as of March 31, 2017) and matures in May 2020. Scheduled maturities are well-laddered and manageable considering that expected FCF generation, reliable market access and backup liquidity all add to Moody's overall financial flexibility. Moody's next scheduled maturity is not until 2018 when $300 million of unsecured notes come due. FULL LIST OF RATING ACTIONS Fitch currently rates MCO as follows: --Long-Term IDR 'BBB+'; --Short-Term IDR 'F2'; --Senior unsecured revolving credit facility 'BBB+'; --Senior unsecured notes 'BBB+'; --Commercial paper 'F2'. Contact: Primary Analyst Jack Kranefuss Senior Director +1-212-908-1791 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Patrice Cucinello Director +1-212-908-0866 Committee Chairperson Monica Bonar Senior Director +1-212-908-0579 Date of Relevant Rating Committee: May 10, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: There were no adjustments made to published financial statements that were material to the rating rationale. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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