S&P: CBOE Holdings, Inc. Rated 'BBB+'; Outlook Is Stable
"The rating on CBOE reflects our view of its leading position among equity options exchange operators in the U. S.," said S&P Global Ratings credit analyst Daniel Koelsch. The rating also reflects the group's scalable technology platform, its capacity to generate strong cash flow from operations, and its strong financial risk profile (CBOE has no debt). As is usual for nonoperating holding companies (NOHCs), we rate CBOE one notch below the 'a-' group credit profile (GCP).
CBOE's business risk profile benefits from a very strong market position in two flagship products: the VIX (options and futures; the VIX is a CBOE proprietary index) and SPX (options on the S&P500 Index, for which CBOE has exclusivity rights). CBOE's exchanges also offer options on other equity indices and single stocks, but generally face stiff competition in these other products. Overall, the group commands a 98.5% market share in U. S. index options (June 30, 2016) and an overall 27% market share in U. S. options trading. However, it lacks the product and geographic diversification of some of its international peers such as NASDAQ Inc. or Intercontinental Exchange. We also view the concentration and dependence on the two flagship products as a relative weakness for the rating, with revenues potentially affected in a prolonged period of low market volatility.
We view the proposed acquisition of Bats Global Markets Inc. as a positive factor for the CBOE group's business risk profile because it would significantly add to CBOE's scale and diversification, with no major overlap apart from single-stock U. S. options.
CBOE has a minimal financial risk profile (FRP) because it has no debt, but plans to issue $1.65 billion of debt to fund the cash portion of the acquisition and to repay Bats' outstanding term loan. This would cause leverage to jump, with pro forma debt-to-EBITDA peaking at 2.3x and funds from operations (FFO) to debt dropping below 30%.
The stable outlook reflects our expectation that CBOE's creditworthiness would not deteriorate if the Bats acquisition materializes on the announced terms. We anticipate that the associated weakening of the financial risk profile would be fully offset by a stronger business risk profile, from an asset class and geographic diversification perspective.
We could downgrade CBOE if its leverage metrics were to significantly weaken beyond our expectations--for example, if the company added more debt than expected or failed to deleverage as fast as we anticipate. This would be the case, in particular, if, due to increased leverage or weaker operating performance, the ratio of FFO to debt were to remain below 35%.
An upgrade in the next two years is a remote possibility, particularly if CBOE does not complete the Bats transaction. If the acquisition is completed, an upgrade would rest on CBOE's ability to integrate Bats smoothly into its culture and management and governance without any key departures, while maintaining its commitment to reducing leverage.