From Standard & Poor's RatingsDirect
On May 16, Standard & Poor's Ratings Services lowered its long-term counterparty credit rating and bank loan rating on The Nasdaq Stock Market Inc. (NDAQ) to BB+ from BBB-. The move placed the company's credit rating below investment grade. The company is removed from CreditWatch Negative, where it was placed on Apr. 11. The outlook is developing.
The credit-rating downgrade is a function of Nasdaq's high debt leverage, resulting primarily from its acquisitions of the INET platform in 2005, and, more recently, its purchase of a 24.1% stake in the London Stock Exchange (LSE), according to Standard & Poor's credit analyst Charles D. Rauch. Current ratings reflect S&P's expectation that Nasdaq will continue to employ debt, bank loans, and/or available on-balance-sheet liquidity to further increase its stake in the LSE.
After being spurned by LSE management, Nasdaq is pursuing this exchange the hard way. It purchased a 14.9% interest in the LSE in mid-April and, shortly thereafter, issued 18.5 million shares of common stock to provide permanent financing for the bulk of this initial stake. Subsequently, Nasdaq purchased an additional 9.2% stake, using available cash and the remainder of its Tranche C long-term bank loan.
Although this increased stake reduced Nasdaq's financial flexibility, an expected £123.4 million special cash dividend from the LSE in June will help restore liquidity. The secondary stock offering and the special dividend boost tangible equity ratios into the positive territory. The net result is a balance sheet that is moderately better than at the beginning of the year. S&P expects Nasdaq will further leverage the balance sheet and/or utilize available liquidity in its pursuit of the LSE.
COURTING QUANDARY. Standard & Poor's is not only concerned about the financial ramifications, but also Nasdaq's merger strategy going forward. In S&P's opinion, a 24.1% LSE stake gives Nasdaq little in terms of either synergistic opportunities or cash-flow generation. To complicate matters, the LSE's share price is getting increasingly expensive and other entities have expressed interest in this target.
There are many possibilities as to what may happen next, but S&P thinks the ramifications on Nasdaq's financial profile could be significant. If another suitor wins, Nasdaq could achieve a nice capital gain on what is now a financial investment. At worst ratings-wise, it could lever up more substantially in the fight to gain control of the LSE.
The developing outlook incorporates the many uncertainties as to how Nasdaq's pursuit of the LSE will play out. Ratings could be lowered if management becomes undisciplined and harms the exchange's financial posture in acquiring additional shares in the LSE. Alternatively, a successful merger that is conservatively financed could lead to an upgrade.