Fitch Rates S&P Global's New Senior Notes 'BBB+'; Outlook Stable
KEY RATING DRIVERS
Diversification: Fitch recognizes the diversification of S&P, with more than half of revenues and EBITDA coming from outside the ratings business. The diversification and strength of the other businesses provides S&P with the flexibility to absorb negative performance or changes in the ratings business.
Business Realignment: S&P has taken several steps to realign its business focus to capital and commodity markets, increase its exposure to recurring subscription revenues and improve operating margins. Its $2.23 billion acquisition of SNL Financial LLC (SNL) in September 2015 provides compelling growth opportunities given minimal product line overlap and at least $100 million of potential synergies. In April 2016, S&P announced the sale of J. D. Power, which did not fit the company's new business focus, for $1.1 billion (closed in September 2016). Finally, it identified more than $140 million in overall productivity savings which remain on track for year-end 2016.
Financial Flexibility: S&P's liquidity position and financial flexibility remain strong given the strength of its businesses and Fitch's expectations for over $900 million of annual free cash flow (FCF) generation. Fitch believes S&P maintains significant financial flexibility following the resolution of several legal and regulatory matters. Pro forma for the J. D. Power sale and SNL acquisition, Fitch estimates S&P's total leverage is approximately 1.8x (pro forma for the sale of J. D. Power and a full year contribution from SNL Financial), well under Fitch's tolerance of 2.5x for the rating. Total debt was $3.8 billion at June 30, 2016 (nearest maturity after the November 2017 notes is $400 million due in August 2018).
Capital Deployment: Fitch expects S&P to continue to deploy FCF towards acquisitions and shareholder returns in the form of dividends and share repurchases. In conjunction with the closing of the sale of J. D. Power, the company announced a $750 million accelerated share repurchase (ASR) plan to be completed no later than the first quarter of 2017. Continued share repurchases during a period of heightened risk of a material legal or regulatory payment could pressure the ratings.
Strong Liquidity: As of June 30, 2016, pro forma for the sale of J. D. Power, the company had $2.6 billion in cash (5% of cash was held in the U. S. prior to the acquisition) and $891 million of availability under its $1.2 billion commercial paper (CP) program (backed by its $1.2 billion credit facility due June 2020). S&P used a portion of the net proceeds from the J. D. Power sale to support its $750 million ASR and Fitch expects the balance to be used for general corporate purposes.
Fitch's key assumptions within the rating case for S&P include:
--Mid-single digit growth and modest margin expansion from cost reduction efforts, divestiture of non-profitable units and inherent operating leverage;
--Fitch expects FCF to exceed $900 million during the rating horizon;
--Continued share repurchases in the context of Fitch's leverage sensitivities.
Ratings may be upgraded when:
--The company's business and operational profile remains in line with current performance without any material deterioration;
--The cumulative effect of acquisitions and share repurchases on the credit profile continues to reflect a conservative balance sheet and financial policy, which may include sustained leverage under 1.5x.
Negative rating actions could occur if there is:
--A shift to leverage over 2.5x without a credible plan to reduce leverage over an appropriate amount of time (i. e. 12-18 months);
--Material disruption, negative operating results or a business model change at the S&P Ratings business that materially impacted margins and FCF.
The company's liquidity position and financial flexibility remain strong given the strength of its businesses and Fitch's expectations for over $900 million of annual FCF generation. Liquidity is supported by cash and cash equivalents totaling $2.6 billion as of June 30, 2016, pro forma for the sale of J. D. Power. Fitch expects S&P to use the net proceeds from the J. D. Power sale to support its $750 million ASR and general corporate purposes. Liquidity is further supported by $891 million of availability ($309 million outstanding) under its $1.2 billion CP program (backed by a $1.2 billion bank credit facility due June 2020) as of June 30, 2016. The company has ample cushion inside of the credit facilities' 4x indebtedness-to-cash flow ratio.
FULL LIST OF RATING ACTIONS
Fitch has assigned ratings for S&P Global, Inc. as follows:
--$500 million senior unsecured notes due 2027 'BBB+'.
The Rating Outlook is Stable.