Fitch Rates Pitney Bowes' New Senior Notes 'BBB-'; Outlook Revised to Negative
Fitch has also assigned a 'BBB-' rating to Pitney Bowes Inc.'s (PBI) $600 million of 3.375% senior unsecured notes due 2021. Net offering proceeds are to be used to repay $300 million of existing 6.125% preferred stock callable in October 2016 and for general corporate purposes including potential debt repayment.
A full list of ratings actions follows at the end of this release.
The Negative Outlook reflects PBI's gross leverage exceeding Fitch's negative rating threshold of 4.0x. Fitch would likely stabilize the Outlook if the company reduces leverage below 4.0x either through debt repayment or EBITDA growth. Although Fitch views actions taken by the company including divesting underperforming assets and consequent debt reduction as positive, continued headwinds in mailing and software contribute to the Negative Outlook.
Fitch believes the ongoing secular issues will challenge the company's ability to maintain a credit profile indicative of an investment grade rating. If these issues continue over the near-term, Fitch will likely reconsider the current 4.0x maximum total leverage threshold for the current rating, which would increase negative rating pressure.
KEY RATING DRIVERS
Market Leadership: The ratings are supported by PBI's significant and entrenched market position in the core U. S. Mailing business, the necessity of mail equipment and services to conduct business across all industries, and the diversity of the company's customer base, from both an industry and size perspective.
Top Line Declines: Fitch continues to be concerned with overall top-line declines, driven by weakness in its small and medium-sized business (SMB) segment, although the declines have been moderating. In constant currency revenue, SMB ended the 2015 fiscal year down 5%, driven by continuing declines in installed meters and weakness in international markets. The Enterprise business was flat, as lower service revenue in production mail was partially offset by increased volumes in presort services. Digital commerce solutions increased 9%, driven by the acquisition of Borderfree, Inc. and higher volume of packages shipped from the U. K. Within Digital commerce, software revenues declined 10% on a reported basis in 2015 due to sales execution issues.
Cyclical Pressures Compound Secular: Fitch believes secular pressures accelerate PBI's challenges, as customers could look to digital mailing as a cost-reduction mechanism, and choose to keep existing equipment. The acceleration of digital substitution for physical transaction mail results in reduced need for PBI's mailing equipment. Although the majority of PBI's revenue is not directly tied to mail volume, Fitch believes continued mail volume declines will drive reduced equipment needs, whether in terms of size, number or functionality.
Transition Underway: Fitch views PBI's initiatives to position itself more as a digital services company positively, and they continue to show traction. For FY 2015, Digital Commerce Solutions constituted 21% of total revenue, up from 14% in FY 2014. However, in the near term, these initiatives will be challenged to offset the declines in the high-margin North American mailing segment. While these initiatives could cannibalize existing physical business, Fitch believes such a strategy is unavoidable, given ongoing digital substitution.
Conservative Financial Policy: Although PBI has stated its commitment to investment grade metrics, they have not publicly defined metrics. Fitch believes that various actions taken over the last few years demonstrate PBI's commitment. PBI has reduced its total debt (including preferred securities) from $4.5 billion in 2011 to $3.4 billion at June 30, 2016. Unadjusted pro forma gross total leverage has declined from 4.7x in 2011 to approximately 4.3x and core leverage has gone from 4.3x to approximately 3.9x pro forma for the issuance (assuming the remaining $300 million of net proceeds is used for debt repayment after the preferred stock is repaid).
Fitch's key assumptions within the rating case for PBI include:
--flat to low single digit top line improvement on a constant currency basis;
--Minimal margin improvement as a majority of the company's expected cost savings have been realized;
--No material change to stated dividend;
--$215 million of share repurchases in 2016;
--Majority of maturities are refinanced.
Positive: Given the secular challenges facing the company, Fitch does not expect positive rating momentum in the near term. Sustainable revenue growth driven by the company's various product initiatives coupled with a commitment to continue reducing absolute levels of debt may drive positive rating momentum.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Lack of traction in the company's digital initiatives and other growth businesses amid ongoing declines in the traditional physical business;
--A change in the company's strategy indicating a willingness to operate above 4.0x;
--Indications of a more aggressive financial policy.
PBI's liquidity position at June 30, 2016 was solid, consisting of $676 million of cash on hand and an undrawn $1 billion revolving credit facility maturing in January 2020, which backstops the company's $1 billion commercial paper program. Liquidity is further supported by the company's annual FCF generation.
Fitch calculates FY 2015 FCF at $180 million. Fitch's current base case projections estimate annual FCF at $150 million-$250 million for the rating horizon. Fitch's FCF calculation deducts PBI's common and preferred dividend payments and does not add back cash flows associated with restructuring payments, and tax payments related to sales of leveraged lease assets. PBI faces material annual maturities over the next several years. However, Fitch recognizes that the company can address a significant portion of its maturities organically with its pre-dividend FCF generation and accessing the capital markets.
FULL LIST OF RATING ACTIONS
Fitch has assigned the ratings for Pitney Bowes Inc. as follows:
--$600 million senior unsecured notes due 2021 'BBB-';
Fitch has affirmed the ratings as follows:
--IDR at 'BBB-';
--Senior Unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loan at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.
--Long-term IDR at 'BBB-';
--Preferred stock at 'BB'.
The Rating Outlook is Negative.