TEXT - S&P revises FTI Consulting outlook to negative

Fri Nov 9, 2012 3:16pm EST

Overview
     -- West Palm Beach, Florida-based FTI Consulting plans to issue
$300 million of senior unsecured notes due 2022. The company also plans to enter
into a new $350 million revolving credit facility due 2017. 
     -- We expect weakened operating performance and modest leverage reduction 
over the next 12 months, following a peak in leverage at year-end 2012.
     -- We are revising our rating outlook on FTI Consulting to negative from 
stable and affirming the corporate credit rating at 'BB+'. We are assigning a 
'BB' issue-level rating and a '5' recovery rating to the proposed notes. We 
are not rating the revolver.
     -- The negative outlook reflects the possibility that we could lower our 
ratings on FTI Consulting if it becomes apparent that 2013 operating 
performance will be weaker than our expectation, causing debt leverage to 
exceed 3.0x-3.1x. 
     -- 
Rating Action
On Nov. 9, 2012, Standard & Poor's Ratings Services revised its rating outlook 
on FTI Consulting Inc. to negative from stable. The corporate credit rating 
remains at 'BB+'. 

At the same time, we assigned the company's proposed $300 million senior 
unsecured notes due 2022 our 'BB' issue-level rating (one notch below the 
corporate credit rating) with a recovery rating of '5', indicating our 
expectation of modest (10% to 30%) recovery for lenders in the event of a 
payment default. FTI Consulting will use the proceeds to refinance its 
existing $215 million senior unsecured notes due 2016 and repay outstanding 
revolver borrowings. As part of the transaction, FTI Consulting will enter 
into a new $350 million revolving credit facility due 2014. We are not rating 
the revolving credit facility. 

Rationale
Our 'BB+' corporate credit rating on FTI Consulting is based on our 
expectation that debt leverage will stabilize to near 3x over the next 15-18 
months through EBITDA growth and that covenant compliance will remain 
adequate. Pro forma for the proposed transaction, FTI Consulting will have 
substantial availability under its $350 million revolving credit facility and 
about $125 million of cash and cash equivalents as of Sept. 30, 2012.

We view FTI's business risk profile as "fair" because of the company's 
dependence on highly mobile and sought-after senior staff, and some earnings 
variability associated with its restructuring practice. The restructuring 
practice is a significant contributor to the company's overall revenues and 
profitability, but its performance can exhibit volatility with business 
cycles. Positive factors including FTI Consulting's segment diversity, 
businesses not strictly tied to the economic cycle, and discretionary cash 
flow generation support our assessment. We view the company as having 
"significant" financial risk because of its aggressive acquisition growth 
strategy and financial policy.

FTI Consulting has five main practice areas: forensics and litigation, 
corporate finance/restructuring, technology, economic consulting, and 
strategic communications.

FTI Consulting's performance is highly dependent on its senior managing 
directors, whose expertise is sought by clients, and whose work commands high 
billing rates and often repeat engagements. Retaining these leaders is 
critical to the company's reputation and success. Although the company has 
been successful in retaining its most senior professionals, this will remain a 
key factor that we will continue to monitor. Maintaining high utilization of 
consultants and the ability to increase the hourly rate charged to clients are 
additional factors essential to profitability growth. FTI Consulting has kept 
utilization rates steady in recent years--about 70% to 80%, depending on the 
segment--by reassigning some employees to new projects in different business 
segments and reducing headcount to better match demand. The company has 
expanded its service offerings over the past few years through acquisitions, 
with increasing focus on certain specialized industries, such as energy, 
health care, and telecommunications. This strategy has further strengthened 
the company's competitive position.

Under our base-case scenario, we expect 2012 revenue to decline at a 
low-single-digit percentage rate from 2011. In 2013 and 2014, we expect 
revenue increases at a low- to mid-single-digit percentage pace. We forecast 
2012 full-year EBITDA to decline at a low- to mid-teen percentage rate because 
of staff reduction charges and weak performance in the technology, forensic 
and litigation consulting, and strategic communications segments. We expect 
low-teens percent EBITDA growth in 2013 (mainly as a result of the absence of 
significant restructuring charges) and mid-single-digit percent growth in 
2014. We believe the restructuring, forensic litigation, and economic 
consulting practices will each grow in 2013 and 2014, which should offset 
further decline in the technology segment.

We expect the EBITDA margin will recover somewhat over the next two to three 
years but remain in the mid-teens percentage area. Recovery to the low-20% 
level of 2009 is unlikely because of the current business mix (reduced 
weighting in technology) and competitive pressures that are contracting the 
technology segment's margins. 

The restructuring business performed better than expected through the first 
three quarters of 2012 as a result of opportunities in Europe and North 
America. This, combined with the growth of the economic consulting practice, 
largely offset softness at other business segments, particularly the 
technology segment. During the third quarter of 2012, revenues decreased 6.7% 
while EBITDA (excluding noncash special charges) fell 16.9%, reflecting higher 
personnel costs. The technology practice's EBITDA margin has declined over the 
past two years. The technology segment contributed about 18.5% of EBITDA for 
the 12 months ended Sept. 30, 2012, down from about 23% for 2011. FTI 
Consulting continues to see increased competition in the technology sector, 
which has led to lower prices and volume. The EBITDA margin has steadily 
declined over the past three years, and was 15.5% for the 12 months ended 
Sept. 30, 2012. The margin decline has been the result of one-time staff 
reduction expenses, pricing pressure in the technology segment, increased 
spending, higher compensation expenses, and lower margins at acquired 
businesses.

Pro forma for the proposed transactions, for the 12 months ended Sept. 30, 
2012, the ratio of total debt to EBITDA (including cash expenses to reduce 
workforce) was 3.2x, above our threshold of 3x for the company at the current 
rating. We expect leverage to rise modestly by the end of 2012 and then drop 
to close to 3x by year-end 2013. For the 12 months ended Sept. 30, 2012, pro 
forma EBITDA coverage of interest expense was 4.6x, and conversion of EBITDA 
to discretionary cash flow was 41%. We expect the conversion of EBITDA into 
discretionary cash flow for 2012 and 2013 to remain healthy, at around 50%. We 
expect FTI Consulting will continue to use its discretionary cash flow to fund 
acquisitions and stock buybacks.

FTI Consulting is very acquisitive, having made numerous acquisitions since 
2005. The company's goal is to increase its international revenue contribution 
to about 30% of consolidated revenue in two years. International operations 
are profitable, but their margins are typically lower than those in the U.S. 
because of scale. As of Sept. 30, 2012, FTI Consulting operated in 24 
countries, accounting for 26% of total revenues, compared with 10 countries in 
2006. Despite its success in incorporating acquisitions into the business, the 
company's aggressive acquisition strategy and integration risks remain 
potential negative factors.

In June 2012, the company announced a $250 million share repurchase program to 
be executed over the next two years. The company generates good discretionary 
cash flow and has excess cash to finance both the buyback program and ongoing 
operating needs. As of Sept. 30, 2012, the company had repurchased $20 million 
of shares. We will continue to closely monitor the company's financial policy 
with regard to its share buybacks and sizable acquisitions.

Liquidity
FTI has adequate liquidity to cover its needs over the near-to-intermediate 
term, even in the event of moderate unforeseen EBITDA declines. Our assessment 
of FTI Consulting's liquidity profile incorporates the following expectations, 
assumptions, and factors:

     -- We expect sources to cover uses for the upcoming 12 to 24 months by 
1.2x or more.
     -- We also expect cash sources will continue to exceed cash uses, even 
with a 20% drop in EBITDA over the next 12 months.
     -- The company has adequate covenant headroom for EBITDA to decline by 
15% without breaching coverage tests.
     -- Because of the company's high conversion of EBITDA to discretionary 
cash flow, we believe it could absorb low-probability, high-impact shocks.
     -- In our opinion, the company has a generally high standing in the 
credit markets.

Pro forma for the refinancing transaction, liquidity sources include a cash 
balance of about $127 million and substantial availability on the company's 
$350 million revolving credit facility. We expect about $130 million of 
discretionary cash flow in 2012 and $135 million in 2013. FTI Consulting's 
next debt maturity is the $350 million revolving credit facility, which 
matures in 2017. 

The proposed credit agreement contains financial covenants, including a 
maximum total and senior leverage ratio as well as a fixed charge coverage 
ratio. The 4x total debt leverage covenant steps down to 3.75x on March 31, 
2016, and the 3x senior debt leverage covenant steps down to 2.75x on March 
31, 2016. The maximum total leverage ratio is the most restrictive covenant. 
Based on our assumptions for 2012 through 2014, we expect the company to 
maintain an adequate margin of compliance over the near-to-intermediate term. 
While working capital usage can fluctuate with revenue growth, capital 
expenditures as a percentage of EBITDA are typically low, at between 9% and 
12%, and should not impede cash flow generation.

Recovery Analysis
We are assigning a 'BB' issue level rating (one notch below our 'BB+' 
corporate credit rating on FTI Consulting) to the proposed senior notes, with 
a recovery rating of '5', indicating our expectation for modest (10% to 30%) 
recovery for lenders in the event of a payment default.

Outlook
The negative outlook reflects the possibility that we could lower our ratings 
on FTI Consulting if it appears that the company's 2013 performance will not 
meet our expectations, rendering year-end leverage above 3.0x-3.1x. We believe 
this would most likely occur as a result of accelerated declines in the 
technology segment, along with negative operating trends in the company's 
other businesses, and debt-financed acquisitions, combined with major share 
repurchases. We could also lower the rating if the EBITDA margin falls below 
14%. We believe this could happen if the technology segment declines further 
as a result of increased competition and if the corporate 
finance/restructuring business experiences a steep decline in business.

We could revise the rating outlook to stable if FTI Consulting were able to 
reduce and maintain debt leverage below 3x, while preserving adequate 
liquidity. 

Related Research And Criteria
     -- 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
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

FTI Consulting Inc.

Ratings Affirmed; CreditWatch/Outlook Action
                                       To                 From
Corporate Credit Rating                BB+/Negative/--    BB+/Stable/--

FTI Consulting Inc.

New Rating
 $300 mil sr unsecd nts due 2022      BB
  Recovery Rating                     5
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