Fitch Rates Broadridge's Senior Unsecured Debt Offering 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Broadridge Financial Solutions, Inc.'s (Broadridge) senior unsecured notes. The company anticipates using the proceeds to repay outstanding debt under its senior credit facility, to finance acquisitions and for general corporate purposes.
Broadridge's Issuer Default Rating (IDR) is 'BBB+', and the Rating Outlook is Stable.
KEY RATING DRIVERS
Resilient Sales: Broadridge benefits from contractual sale agreements and a business model that demonstrates a 90% recurring revenue stream and a 98% client revenue retention rate. Fitch believes that the company can sustain its competitive position given its long-term client relationships, integral service provided to meet regulatory compliance, and high switching cost associated with changing vendors.
Dominant Market Position: Broadridge has a leading share in the proxy distribution market processing over 80% of the outstanding shares in the U. S. and in the trade processing segment providing services to 16 of the 22 primary fixed income dealers in the U. S. Fitch believes that the proxy business faces minimal competitive threats and pricing that is largely insulated by SEC regulations.
Pending Acquisition: Broadridge will acquire DST Systems, Inc.'s North American Customer Communications Business for $410 million in cash (subject to closing adjustments). Fitch does not expect the transaction will have a material effect on Broadridge's credit profile, as the company's adjusted leverage (adjusted debt to EBITDAR) is anticipated to remain under 2.0x. The transaction is expected to close in July 2016. Broadridge also completed a smaller acquisition in June 2016 of 4sight Financial Software Limited for an undisclosed amount.
Exposure to Regulatory Changes: Regulations affect Broadridge's clients and hence the clients' ability and need to purchase services provided by Broadridge. Broadridge is also subject to regulatory oversight. The potential for regulatory changes to alter the competitive environment for proxy distribution is a risk. However, Fitch believes it is unlikely any change could immediately disrupt Broadridge's model and any changes would be phased in amid a lengthy process.
Steady Free Cash Flow (FCF) Generation: The company's core Investor Communications and Global Technology and Operations segments produce steady FCF supported by long-term contracts and customer relationships, resulting in minimal exposure to economic volatility. Fitch expects FCF (after dividends) to be in the range of $250 million and $300 million during the rating horizon. The company currently targets a dividend of 45% of net earnings.
Leverage Target: The company's target adjusted leverage of 2x positions the company strongly in the rating category. As of latest 12 months (LTM) March 31, 2016, adjusted leverage was 1.7x and gross leverage was 1.3x. Fitch expects the adjusted leverage metric to trend upward over the next couple of years toward the company's 2x longer-term target as it executes on its acquisition and share repurchase capital allocation strategies.
Investment Grade: Management is committed to an investment grade (IG) rating. Broadridge's IG rating is also an important consideration from the perspective of its clients and the regulatory agencies due to the critical services the company provides to the financial sector.
Acquisitive Growth Strategy: Fitch expects Broadridge to remain acquisitive while returning cash to shareholders within the context of its leverage target. Integration and execution risk remains, but it is moderated by management's demonstrated discipline in its acquisitive strategy and strict acquisition criteria.
Moderate Client Diversification: 25% of sales are concentrated in five clients with the largest client accounting for approximately 6%. While not an immediate concern, Fitch believes additional consolidation in the financial services industry could impact Broadridge's operation and bargaining power with its customers. Some of the trends leading to consolidation, including regulatory cost burdens, are favorable to Broadridge's business model.
Fitch's key assumptions within the rating case include:
--Organic growth in the low - to mid-single digits with periods of higher growth driven by acquisitions;
--EBITDA in the low 20% range with moderate expansion in the near term;
--FCF to adjusted debt, longer-term, is expected to be near 20%, with adjusted debt to EBITDAR of approximately 2x or less;
--Excess FCF for share repurchases and acquisitions.
--Broadridge's acquisition and growth strategy eventually results in greater diversification and size to consider a higher rating;
--Total adjusted debt/EBITDAR is maintained at or below 2x.
--A more aggressive acquisition strategy or poorly executed acquisitions can negatively affect the rating;
--Total adjusted debt/EBITDAR of 2.2x to 2.3x or higher on a sustained basis leads the agency to a downgrade in the absence of a credible delevering plan.
As of March 31, 2016, liquidity was solid at $810 million, which included $355 million in cash (of which Fitch considers $130 million to be readily available) and $455 million availability on its $750 million senior unsecured revolving credit facility which matures in August 2019. The nearest maturing debt consist of $125 million of unsecured notes due 2017.
Date of Relevant Rating Committee: Feb. 12, 2016.
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:
--No material adjustments have been made that have not been disclosed in public filings of this issuer.