TEXT-S&P revises TransUnion outlook to negative
Overview -- U.S. credit and information management solutions provider TransUnion announced today that it plans to issue $400 million of Holdco PIK toggle notes to finance a dividend to shareholders. -- The additional debt increases our pro forma June 30, 2012 last-12 months adjusted leverage to approximately 6.75x from 5.9x. -- We are revising our outlook on the company to negative, and assigning our 'B-' issue level rating and '6' recovery rating to the proposed $400 million senior unsecured PIK toggle notes to be issued by parent TransUnion Holding Co. -- The negative outlook reflects the increased pro forma leverage, and the possibility that weak and uncertain global macroeconomic conditions could forestall deleveraging over the coming year. Rating Action On Oct. 17, 2012, Standard & Poor's Ratings Services revised its outlook on Chicago-based TransUnion Corp. to negative from stable. The 'B+' corporate credit rating and all issue-level and recovery ratings on the company's existing debt remain unchanged. We also assigned our 'B-' issue-level rating to the proposed $400 million new senior unsecured payment-in-kind (PIK) toggle notes to be issued by TransUnion Holding Co. ("Holdco"), the parent company of TransUnion Corp. We assigned a '6' recovery rating to the new notes, indicating our expectation for negligible (0%-10%) recovery in the event of a payment default. Rationale We are revising the outlook to negative to reflect our expectation that pro forma leverage will remain above 6.5x for an extended period of time, and that pro forma free operating cash flow (FOCF) to total debt will decline to about 3% from over 8%. Additionally, external factors or financial policy may prevent leverage falling to below 6.5x by the end of 2013. TransUnion's ratings reflect its "highly leveraged" financial profile and "satisfactory" business risk profile. The company's good market position and high barriers to entry in the global credit information sector, along with consistent strong profitability and positive FOCF help offset the company's high leverage and very aggressive financial policies. Our near-term ratings assumptions include: -- High-single-digit revenue growth for 2012, led by improved U.S. consumer credit market conditions, new vertical expansion, emerging market growth, and moderating growth thereafter; -- Stable EBITDA margins, with operating leverage offset by growth investments; and -- Debt leverage decreasing to below 6.5x by the end of 2013. TransUnion provides data and information management tools that help businesses manage risk and improve decision-making, and provides credit data directly to consumers. With about 45,000 customers in 32 countries, the company is one of three major global credit reporting and analytic providers. We expect high revenue growth to continue for the remainder of 2012, but then to moderate over the next year because of ongoing global macroeconomic uncertainty that could reverse recent improvement in consumer credit markets, and because of strong competition in all business segments. TransUnion reported solid year-over-year revenue growth of 10% and 12% for the three and six months ended June 30, 2012, respectively. Acquisitions accounted for 2.6% of the growth, while weak foreign currencies hurt revenue by about 2% for each period. We believe that competition--along with the acquisition and cultivation of additional data sources and higher operational costs from expansion into new markets--will prevent meaningful margin improvements over the next year. Foreign exchange volatility could also modestly pressure margins. However, natural operating leverage and ongoing cost-reduction initiatives should enable TransUnion to preserve EBITDA margins in the low- to mid-30% area. Last-12-months pro forma debt (including the Holdco PIK toggle notes) to EBITDA on June 30, 2012 will increase to 6.75x from 5.9x, in our view. We expect the company's FOCF to decline by about half from a run rate of about $150 million, and therefore conclude FOCF to debt will decline to about 3% from 8%. We believe that the majority of FOCF will continue to be used for growth investments, including acquisitions, and that leverage reduction will be attained largely through EBITDA growth. We expect leverage to drop to about 6.3x by the end of 2013. The company's pursuit of a debt-financed distribution with an already highly leveraged balance sheet and only modest balance-sheet improvement since the recent leveraged buyout exhibits an even more aggressive financial policy than we had anticipated. The current rating and outlook incorporate our expectation that TransUnion will maintain sufficient restricted payments capacity (as defined in the notes agreement) to satisfy holding company interest payments with cash. Liquidity TransUnion has "adequate" liquidity, with sources of cash likely to exceed uses by at least 1.2x over the next 12 to 24 months. Cash sources include pro forma cash of about $130 million and full revolver availability at the close of the transaction, along with the FOCF expectations outlined above. Cash uses are moderate, including about $75 million of annual capital expenditures, low working capital needs, and $9.5 million of mandatory amortization. However, given the company's high leverage and relatively low cash balances and cash flow generation, we believe that the company could be subject to low-probability, high-impact events, such as legal and operational costs related to a potential data breach. TransUnion's credit agreement contains one financial covenant, a senior secured net leverage ratio, which is in effect only when the company has letters of credit or revolving credit loans outstanding. The ratio is set at 4x for the remaining life of the senior secured credit facility. The company was not required to adhere to this covenant for the June 30, 2012 period, and we do not expect the financial covenant to restrict liquidity over the next year. The company does not have any material near-term debt maturities. Recovery analysis For the complete recovery analysis, see Standard & Poor's updated recovery report on TransUnion, to be published as soon as possible after this release on RatingsDirect. Outlook The negative outlook is based upon pro forma leverage increasing to 6.75x at the close of the transaction, which we view as high for the rating. Although we expect leverage to drop below 6.5x by year-end 2013, acquisitions, dividends, or weak and uncertain global economies may forestall the leverage reduction we expect. We could revise the outlook to stable if the company's meets our 2013 year-end leverage target through expected EBITDA growth or debt repayment. We would lower the corporate credit rating to 'B' if deteriorating economies, heightened competition, debt-funded acquisitions, or additional debt-funded dividends prevent leverage from falling below 6.5x by 2013 year-end. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From TransUnion Corp. Corporate Credit Rating B+/Negative/-- B+/Stable/-- New Ratings TransUnion Holding Co. Senior Unsecured $400 mil PIK toggle nts B- Recovery rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.