TEXT-S&P revises Bankrate rating to '3'
Overview -- We have updated our recovery analysis for U.S. ad-supported personal financial information services and aggregate rate financial data provider Bankrate. -- We are revising our recovery rating on the senior secured debt to '3' from '4' based on an increased estimated enterprise value at default, reflecting better operating performance and recent acquisitions. -- At the same time, we are affirming our 'BB-' corporate credit rating and the issue-level ratings on the company. -- The stable rating outlook reflects our expectation that Bankrate will experience healthy growth over the medium term and that acquisitions could increase debt leverage somewhat Rating Action On June 25, 2012, Standard & Poor's Ratings Services revised its recovery rating on North Palm Beach, Fla.-based Bankrate Inc.'s secured debt upward to '3' from '4'. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery prospects in the event of a default. We also affirmed our 'BB-' corporate credit rating on Bankrate. The outlook is stable. In addition, we affirmed our 'BB+' issue-level rating on the company's $30 million super-priority revolver credit facility and our 'BB-' issue-level rating on its senior secured notes and senior secured revolving credit facility. The recovery rating on the tranche A debt is '1', indicating expectations for very high (90%-100%) of recovery in the event of payment default. Rationale The rating on Bankrate reflects our expectation that leverage will remain moderate as the company continues to benefit from the growth in online advertising. We consider the company's business risk profile "fair" (based on our criteria), reflecting its exposure to the financial services industry, the highly competitive online advertising market, and its acquisition-oriented growth strategy, while also weighing its strong EBITDA margin. We view Bankrate's financial risk profile as "significant," with the potential for debt-financed acquisitions and shareholder-favoring transactions tempering the benefit of moderate debt leverage. Bankrate offers ad-supported personal financial information services and aggregates rate data for more than 300 financial products from roughly 4,800 institutions. It generates revenue primary through lead generation advertising and hyperlink (cost per click) advertising, both of which pay based on performance, and display advertising. The customer base is diverse, although advertisers are mainly financial institutions, subject to prevailing economic conditions. Like most Internet companies, Bankrate depends on search engines for a substantial portion of its Internet traffic. Significant changes to search engine algorithms could hurt the volume of traffic reaching Bankrate Web sites. Still, it has benefited from changes that reward sites with higher quality content. Bankrate will have to maintain the relevance of its content to Internet users to ensure steady streams of Internet traffic. Bankrate has been a very active acquirer. Recent acquisitions expanded its presence in the insurance and credit card verticals. We believe insurance-related business is generally less cyclical than some of its other financial products, and provides a large growth opportunity for the company. Bankrate can use its company-owned Web sites and editorial and media relationships to drive traffic to acquired sites. The credit card segment is the only one in which Bankrate receives compensation based on its clients' conversion of leads to an approved application; it is therefore vulnerable to lower credit card approval levels. Our base-case 2012 scenario assumes low- to mid-teen percentage organic revenue growth, with total revenue growth of over 20% on the benefit from the InsWeb acquisition. We believe the EBITDA margin will be around 30% in 2012, leading to EBITDA growth of 20% or more, as the integration of the lower margin InsWeb business and increased marketing spending offset higher gross margins reflecting increased organic revenue. In 2013, we expect revenue growth of 10% or more and mid- to high-teen percentage EBITDA growth. For the first quarter of 2012, Bankrate's revenue and EBITDA increased 26% and 23%, respectively, year over year, with growth from all products. For the 12 months ended Sept. 30, 2011, the adjusted EBITDA margin was 29.8%, slightly lower than levels from one year earlier on increased marketing expenses. Under our base-case scenario for 2012, lease-adjusted leverage will fall to 1.3x and lease-adjusted coverage of interest will increase to around 7.0x, mainly through EBITDA growth. In 2013, we expect adjusted leverage to decrease to 1.1x and adjust interest coverage to rise to 8.0x or more. Lease-adjusted debt leverage was 1.4x for the 12 months ended March 31, 2012, from EBITDA growth and the repayment of $105 million of debt with proceeds from Bankrate's IPO in the second quarter of last year. Leverage is below the indicative significant financial risk threshold of 3x to 4x adjusted debt to EBITDA, but we expect leverage could drift higher, given Bankrate's appetite for acquisitions and the potential for returns to shareholders. Lease-adjusted coverage of interest was 4.8x for the year ended March 31. Conversion of adjusted EBITDA to discretionary cash flow was about 40% during the 12 months ended March 31, 2012, on expenses related to the IPO. In 2012 and 2013, we expect the conversion rate to improve to around 60% on higher EBITDA and the absence of one-time charges. Liquidity In our view, Bankrate has "strong" liquidity to cover its needs over the next 12 to 18 months, including interest payments and ongoing operating needs. Our view of the company's liquidity profile incorporates the following expectations and assumptions: -- We expect sources of liquidity to exceed uses by more than 1.5x over the next 12 months. -- We also expect cash sources to continue exceeding cash uses, even if EBITDA declines 30%. -- We expect Bankrate could maintain financial covenant compliance, even with a 30% EBITDA decline. -- We believe it would be able to absorb high-impact, low-probability events. -- We also believe Bankrate has a satisfactory standing in the credit markets. Sources of liquidity include cash balances of $64.5 million, full availability under its $100 million revolving credit facility, and expected discretionary cash flow of $90 million or more in 2012 and over $100 million in 2013. Capital spending requirements are modest and Bankrate has no debt maturities until 2015. Bankrate is currently subject to a maximum leverage covenant of 4.25x on its revolving credit facilities. As of March 31, 2012, it had covenant headroom of almost 70% with this covenant. The covenant does not step down and we expect headroom under the covenant to increase in the future. Recovery analysis See Standard & Poor's recovery report on Bankrate, to be published following the release of this report on RatingsDirect. Outlook Our stable outlook reflects our expectation that Bankrate will experience healthy growth over the medium term and that acquisitions could increase debt leverage somewhat. We could lower the rating if operating performance deteriorates, likely in conjunction with increasing competition. We could consider an upgrade over the longer term if the company can expand its revenue base and maintain its good competitive position, high profitability, and moderate debt leverage. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Bankrate Inc. Corporate Credit Rating BB-/Stable/-- Senior Secured tranche A BB+ Recovery Rating 1 Ratings Affirmed; Recovery Rating Revised Bankrate Inc. To From Senior Secured tranche B & 11.75% nts BB- BB- Recovery Rating 3 4