Fitch Lowers Western Union's IDR to 'BBB+'; Outlook Negative

  Fitch Lowers Western Union's IDR to 'BBB+'; Outlook Negative

Business Wire

NEW YORK -- November 15, 2012

Fitch Ratings has lowered the Issuer Default Rating (IDR) for The Western
Union Company (Western Union) and all senior unsecured ratings to 'BBB+' from
'A-'. The Rating Outlook is Negative.

The ratings downgrade reflects the following considerations:

--Western Union provided initial guidance for 2013 that is significantly below
expected 2012 results. Specifically, the company believes revenue may be flat
to down modestly but GAAP operating income may be down 10% to 15% as margins
decline.

--The company is planning to lower pricing for international remittance
services in certain corridors beginning in the fourth quarter of 2012 in
effort to regain lost market share in certain regions. The company is also
planning to increase its investment in compliance and technology in the coming
year which will increase operating expenses.

--Western Union raised its dividend per share by 25% beginning December 2012.
Fitch estimates that the company's new dividend rate represents approximately
20% of expected 2013 EBITDA. This level is well in excess of similarly rated
entities at the 'A-' level.

--The board of directors authorized an additional $550 million share
repurchase plan which expires Dec. 31, 2013. The company has $194 million
remaining on its 2012 authorization which expires at the end of this year.

--Fitch believes that the company's decision to increase its dividend and
maintain its share repurchase activity in the wake of unusually poor guidance
for 2013 is indicative of a change in philosophy at the company in terms of
how it expects to manage the balance sheet and capital allocation going
forward.

Fitch believes there are several drivers behind Western Union's need to reduce
prices. The primary issue is the company's loss of the majority of its agents
for its Vigo and Orlandi Valuta (OV) brands in Mexico related to new
compliance regulations. These brands have historically been positioned as
lower priced service providers for the U.S. to Mexico and Latin America
corridors. Fitch believes Western Union will reduce prices at its Western
Union branded agents to make up for the loss of Vigo and OV agents. In
addition, Western Union has held prices relatively firm the past two years on
average across its business which has resulted in EBITDA margin growth for its
consumer to consumer segment but has evidently led to the company pricing
itself out of certain markets. Price initiatives over the next year are
intended in part to offset the lost competitiveness of the past 24 months.
Fitch notes that the company undertook a similar initiative related to its
domestic U.S. remittance business in late 2009 that subsequently resulted in
significant revenue and market share growth.

The Negative Outlook reflects Fitch's belief that there is a significant
increase in event risk following the third quarter earnings announcement as
the stock price has declined nearly 30%. Fitch estimates that Western Union
now trades at a forward enterprise value to EBITDA multiple of approximately
6x. Fitch believes that this could lead to a potential third party leveraging
event, either in the form of an LBO or an activist investor forcing a
leveraged recapitalization of the company. Of note, Fitch believes that the
floating rate notes due March 2013, the 6.5% senior unsecured notes due
February 2014, the 3.65% senior unsecured notes due 2018 and the 6.2% senior
unsecured notes due June 2040 contain some form of a change of control
provision.

The ratings could be lowered if Western Union significantly increases leverage
to fund shareholder friendly actions or if EBITDA profit margins do not
rebound from the historically low levels expected in 2013. The ratings could
be stabilized if Western Union's pricing initiatives lead to material gains in
share and revenue growth as well as a rebound in the equity valuation of the
stock.

Fitch believes that Western Union's core business model remains intact as does
its superior competitive position. Fitch believes that cash-based remittance,
particularly on the receive side, will continue to represent the vast majority
of the overall market which limits the potential competition from cash-less
based remittance alternatives. As a result, Western Union's strength in
breadth and scale of agent locations will likely remain fundamental to the
business. Fitch believes that these recent developments may lead to lower
EBITDA margin expectations longer term for the company, although it is equally
possible that margins will rebound with strong revenue growth. Either way,
Fitch expects the company to remain the dominant remittance provider with
strong margins and free cash flow as well as a high return on invested
capital. This supports the high investment grade nature of the credit but also
leads to significant event risk from investors that see an opportunity to
leverage the balance sheet.

Credit strengths include:

--Extensive domestic and growing international agent network with a strong
worldwide brand.

--Revenue stability from strong global diversification and consumer exposure.

--An asset-light business model with a largely variable cost structure due to
the company's network of agents which generally own and operate the retail
locations.

Credit concerns include:

--The compliance risks associated with regulations governing Western Union's
business in numerous jurisdictions worldwide. The company recently received a
subpoena by the U.S. Attorney's Office in California related to an
investigation against a former Western Union agent. The company was also
notified that it is the subject of an investigation into structuring and money
laundering. It is not possible to estimate the potential liability, if any, to
the company from this action.

--New payment technologies could challenge traditional remittance services,
particularly if certain economies broadly adopt cashless payments, however,
this trend will likely take years to materially impact Western Union, if at
all.

--Event risk dominated by shareholder friendly actions as the ratings
incorporate Fitch's expectation that Western Union will use the majority of
its excess free cash flow for stock buybacks and acquisitions.

--The risk of adverse political environments or legislation impacting
migration flows although this risk is mitigated by Western Union's broad
geographic diversification.

--Significant foreign currency exposure given broad international
diversification although natural hedges in the cost structure of the business
essentially protect profitability as a percentage of revenue.

--Longer term, Western Union is likely to face increased competition from
regional and multi-national banks entering the remittance market. However,
Western Union's relatively unique customer base represents a potential asset
to financial institutions looking to offer traditional services to migrant
workers which the company may be able to monetize in the future.

Liquidity as of Sept. 30, 2012 was solid with cash of $1.4 billion and $1.5
billion available under a $1.65 billion senior unsecured revolving credit
facility, expiring January 2017, which fully supports Western Union's $1.5
billion 4(2) commercial paper program. In addition, free cash flow was
approximately $700 million over the latest 12 month period.

Total debt as of Sept. 30, 2012 was $3.4 billion consisting principally of
$150 million outstanding in commercial paper with an average term of one day,
$300 million in floating rate (L plus 58 basis points) notes due March 2013;
$500 million in 6.5% senior unsecured notes due February 2014; $1 billion in
5.93% senior unsecured notes due October 2016; $400 million in 3.65% senior
unsecured notes due August 2018, $325 million in 5.253% senior unsecured notes
due April 2020; $500 million in 6.2% senior unsecured notes due November 2036;
and $250 million in 6.2% senior unsecured notes due June 2040.

Fitch has lowered the following ratings of Western Union:

--IDR to 'BBB+' from 'A-';

--Senior unsecured to 'BBB+' from 'A-'; and

--Senior unsecured credit facility to 'BBB+' from 'A-'.

Fitch has affirmed the following ratings of Western Union:

--Short-term IDR at 'F2';

--Commercial paper (CP) program at 'F2'.

The Rating Outlook is Negative.

WHAT COULD TRIGGER A RATING ACTION

Future developments that may, individually or collectively, lead to negative
rating action include:

--A significant increase in leverage to fund shareholder friendly actions; or

--If EBITDA profit margins do not rebound from the historically low levels
expected in 2013.

Future developments that may, individually or collectively, lead to positive
rating action include:

--The current Rating Outlook is Negative. As a result, Fitch does not
currently anticipate developments with a material likelihood, individually or
collectively, leading to a rating upgrade.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug. 8, 2012;

--'Evaluating Corporate Governance', dated Dec. 13, 2011;

--'Rating Technology Companies', dated Aug. 9, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

Rating Technology Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682324

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Contact:

Fitch Ratings
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Senior Director
Fitch, Inc.
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