NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Thomson Reuters Corp.'s (TRI) benchmarked sized senior unsecured notes maturing 2017 and 2024. Proceeds from the offering are expected to be used for general corporate purposes which may include the repayment of outstanding debt and to finance a portion of its planned share repurchases. As of June 30, 2014, TRI had approximately $8.1 billion of debt outstanding. A full list of ratings is at the end of this release.
TRI's offered notes include (similar to TRI notes issued over the past few years) 1) a limitation on liens over 10% of Shareholders Equity, excluding standard carve-outs, 2) a put should a change of control (at 50% of voting shares) and downgrade below investment grade (as defined) occur and 3) a cross-default in the event of non-payment of principal greater than 3% of Shareholders Equity.
KEY RATING DRIVERS
--The ratings reflect TRI's cash flow generating ability, geographic and product diversification, sound balance sheet and consistent and conservative financial policies. Fitch expects the company will continue to target 2.5x net unadjusted leverage.
--Fitch continues to believe the ratings have sufficient capacity to accommodate the company's $1.0 billion share repurchase program within the context of its 2.5x net leverage target.
--The company's capital allocation strategy will remain focused on investments in its core businesses, acquisitions and return of capital to shareholders (via dividends and/or share buybacks) while remaining disciplined in its approach to divestments and acquisitions.
--Fitch recognizes that there are meaningful barriers to entry in TRI's core businesses. There are also a limited number of well-capitalized competitors that compete predominantly on product differentiation, quality and delivery.
--The ratings and Outlook reflect Fitch's comfort with management's effort in improving the F&R business's performance, its geographic and product diversification and its FCF generation.
Overall the proposed issuance is within Fitch's expectations and will not have a material impact on TRI's credit protection metrics. TRI's unadjusted gross leverage was 2.6x through the LTM period ended June 30, 2014, reflecting a modest increase from 2.5x as of year-end 2013. Net unadjusted leverage stood at 2.35x as of the LTM period ended June 30, 2014. Fitch expects unadjusted net leverage to remain under 2.5x over the next few years.
TRI generated approximately $94 million of free cash flow (FCF) during the LTM period ended June 30, 2014. Fitch expects that FCF will strengthen in line with anticipated operating margin expansion. Capital expenditures during 2014 are expected to be approximately $1 billion.
Rating concerns include cyclicality of the Financial and Risk (F&R) segment. The segment was down 2% (down 3% organically) in the first six months of 2014. However, TRI's overall revenue/product diversification creates a cushion to absorb some pressures within a particular segment. Organic growth in TRI's other divisions mitigated most of the F&R organic decline, resulting in consolidated revenues up 1% (organic revenue up 1%), from ongoing businesses.
TRI has guided to low single-digit growth in total ongoing revenues ($12.5 billion revenue base in 2013) and adjusted EBITDA margins in the range of 26% to 27% (24.5% in 2013). Fitch believes these targets are achievable and are reflected in Fitch's FCF expectations. However, the ratings have tolerance for revenue and EBITDA margin expansion to be less than TRI's expectations.
Fitch recognizes that in the near term, TRI continues to have some opportunity to reduce cost, particularly with elimination of legacy products, benefiting EBITDA margins. However, the ratings reflect the predominantly fixed-cost business and high operating leverage. Fitch's expects that, long-term, EBITDA margins will be more susceptible to downturns. During the recent downturn, the F&R segment generally exhibited less operating leverage (on an EBITDA basis) than Fitch would have anticipated. Cost reductions in connection with the integration of Reuters provided a significant offset to declines in revenues.
Conversely, EBITDA margins would be expected to rebound meaningfully upon the return to revenue growth. The subscription nature of the business provides a lag which gives management visibility on the need for fixed-cost actions to preserve margins.
TRI's liquidity position is adequate for the rating given access to capital markets and expected FCF generation. Cash and cash equivalents totaled $704 million as of June 30, 2014. Liquidity is also supported by TRI's $2 billion commercial paper (CP) program. The CP program is supported by its undrawn $2.5 billion revolving credit facility that expires May 2018. TRI has ample cushion inside of the facility's 4.5x net debt-to-rolling LTM adjusted EBITDA leverage covenant. TRI's debt maturity profile is well-laddered with C$600 million scheduled to mature during the remainder of 2014 followed by C$600 million during 2015 and two issues in 2016 consisting of C$750 million and $500 million.
RATING SENSITIVITIES
Rating upside is limited. However, an explicit commitment to and sustained track record of more conservative balance sheet metrics could merit upgrade consideration.
A significant acquisition or heavy repurchases that could lead to TRI operating materially outside its 2.5x net leverage target for several sequential periods, without a publicly stated plan to de-lever, could result in a negative rating action.
Fitch currently rates TRI has follows:
TRI
--IDR 'BBB+';
--Bank credit facility 'BBB+';
--Senior unsecured notes 'BBB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=879034
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