Fitch Affirms Broadridge's IDR at 'BBB '; Outlook 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.
Exposure to Regulatory Changes: Regulations affect Broadridge's clients and hence the client's ability and need to purchase services provided by Broadridge. In addition, 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 (adjusted debt to EBITDAR) positions the company strongly in the rating category. As of latest 12 months (LTM) December 2015, the company reported 1.6x adjusted leverage and 1.2x gross leverage. Fitch expects this 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. Fitch notes that Broadridge's IG rating is also an important consideration from the perspective of the regulatory agencies and clients, based on the critical services the company provides to the financial sector.
Acquisitive Growth Strategy: Fitch expects the company to remain acquisitive while returning cash to shareholders within the context of its leverage target. Fitch notes that integration and execution risk remains. However, this risk is moderated as management has demonstrated discipline in its acquisitive strategy and maintains 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 favourable 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 2.25x or higher on a sustained basis leads the agency to a downgrade in the absence of a credible delevering plan.
As of December 2015, liquidity was solid at \\$1 billion, which included \\$305 million in cash and \\$520 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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Broadridge Financial Solutions, Inc.
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.