Fitch Affirms Thomson Reuters' IDR at 'A-'; Outlook Stable
NEW YORK -- May 3, 2013
Fitch Ratings has affirmed Thomson Reuters Corp.'s (TRI) long-term Issuer
Default Ratings (IDRs) and its senior unsecured note ratings at 'A-'. The
Rating Outlook is Stable.
Key Rating Drivers:
Fitch's ratings for TRI reflect the company's cash flow generating ability,
its geographic and product diversification, sound balance sheet, and
consistent and conservative financial policies. Fitch expects that TRI will
continue to target 2.0x net unadjusted leverage.
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.
Fitch believes management will continue to be disciplined in its approach to
divestures and acquisitions. Fitch expects proceeds from divestures and cash
generated by operations to be used for investments into its core businesses,
acquisitions and for return of capital to shareholders (via dividends and/or
Rating concerns include cyclicality of the Financial and Risk (F&R) segment.
The segment was down 2% (3% organically) in the first quarter of 2013.
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 down 1%), from ongoing
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 Fitch's expectations that,
long-term, EBITDA margins will be more susceptible to future downturns. During
the recent downturn, the F&R segment generally exhibited less operating
leverage (on an EBITDA basis) than Fitch would have anticipated for a
predominantly fixed-cost business. Cost reductions in connection with the
integration of Reuters provided a significant offset to declines in revenues;
providing support to EBITDA margins. Fitch notes that the subscription nature
of the business provides a lag which gives management visibility on the need
for fixed-cost actions to preserve margins.
Also, as with other highly rated media companies, the potential threat of
financial policy revisions is an inherent concern.
Rating upside is limited. However, an explicit commitment to and sustained
track record of more conservative balance sheet metrics could merit upgrade
Fitch believes that TRI is committed to its balance sheet parameters. However,
a significant acquisition or heavy repurchases that could lead to TRI
operating materially outside its 2x net leverage target for several sequential
periods, without a publicly stated plan to de-lever, could result in a
negative rating action.
FCF, Liquidity and Leverage
Based on Fitch's calculations, last 12 months (LTM) free cash flow (FCF; after
dividends) as of Dec. 31, 2012, was $706 million and LTM March 31, 2013 FCF
was $479 million. Based on Fitch's conservative model, Fitch expects FCF to be
in the range of $550 million to $700 million. TRI's overall pension position
was 84% funded. Fitch does not expect any significant cash drains related to
pension plan funding. Fitch's FCF expectations assume approximately $1 billion
in capital expenditures.
TRI has guided to low single-digit growth in total ongoing revenues ($12.4
billion revenue base in 2012) and adjusted EBITDA margins in the range of 26%
to 27% (26.6% in 2012). Fitch believes these targets are achievable and are
reflected in Fitch's FCF expectations. That said, the ratings have tolerance
for revenue and EBITDA margin expansion to be less than TRI's expectations.
Cash and cash equivalents totaled $423 million as of March 31, 2013. Liquidity
is also supported by TRI's $2 billion commercial paper (CP) program. There
were no borrowings at year-end 2012; however, Fitch estimates CP borrowings
were around $300 million at the end of March 2013. The CP program is supported
by its undrawn $2 billion revolving credit facility that expires August 2016.
TRI has ample cushion inside of the facility's 4.5x net debt-to-rolling LTM
adjusted EBITDA leverage covenant.
As of March 31, 2013, debt totaled $7.5 billion, Fitch estimates unadjusted
gross leverage at 2.1x, and unadjusted net leverage at 2x. Fitch expects
unadjusted gross leverage to remain under 2.25x over the next few years and
unadjusted net leverage to be below the company's target of 2x.
TRI has the following near-term maturity schedule:
--$1 billion in notes maturing in 2013;
--$1.4 billion in notes maturing in 2014;
--Approximately $600 million coming due in 2015.
Given TRI's liquidity position, access to capital markets and FCF generation,
Fitch believes TRI has the flexibility to address upcoming maturities and make
acquisitions and/or share repurchases.
Fitch has affirmed the following ratings:
--IDR at 'A-';
--Bank credit facility at 'A-';
--Senior unsecured notes at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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