TEXT - S&P cuts Western Union Co rating to 'BBB+'
Overview -- The global market for money transfer is becoming increasingly competitive, forcing Western Union Co. to cut prices to retain or grow its current market share. -- At the same time, the company announced a 25% increase in dividends and board authorization for $550 million of additional share repurchases. Given our expectation for lower earnings over the coming year, we view this decision as a sign that management is becoming increasingly aggressive with its liquidity position in order to enhance shareholder value. -- As a result, we are lowering the long-term issuer credit rating on Western Union Co. to 'BBB+' from 'A-'. -- We also revised our ratings outlook to negative from stable. Western Union's price-cutting strategy could lead to sustained lower earnings. Unless the company can return to the stronger earnings and cash flows it produced in the past few years and fund and its shareholder initiatives without increasing its financial leverage or depleting cash, we could lower the rating. Rating Action On Nov. 9, 2012, Standard & Poor's Ratings Services lowered its long-term issuer credit Englewood, Colo.-based Western Union Co. (WU) to 'BBB+' from 'A-'. At the same time, we revised the outlook to negative from stable. Rationale The downgrade is based on the increasingly competitive market for money transfer, price cutting that we expect to limit earnings over the next year, compliance changes that have affected the U.S. to Mexico and other Latin American money-transfer corridors, and management's decision to increase dividends and share repurchases despite the more challenging conditions. The global money transfer business has recently become more competitive, resulting in market-share challenges in several money-transfer corridors for WU. The company also faces competition from electronic channels--including digital and account-based money transfers--in which WU is a smaller participant but growing quickly. WU's business has also slowed as a result of compliance changes affecting the U.S. to Mexico and other Latin American money-transfer corridors. The company has ended its agreement with more than 7,000 agents (40% of its total agents in Mexico) that were not meeting new compliance requirements. In light of this slowdown for WU's money-transfer business, the company announced a new strategy that includes cutting prices and cost-savings initiatives. We factored into our assumptions a low double-digit decline in EBITDA and expect debt to adjusted EBITDA to rise to mid-to-high 2x over the next two years. Management's focus on building shareholder value is moderately aggressive, in our view, especially in light of these new developments. Since 2009, WU has repurchased approximately $2.2 billion in shares. Including the recently announced $550 million share repurchases authorization, WU can repurchase up to $750 million through 2013. The quarterly dividend per share gradually increased over the past couple of years, and, under the new shareholder plan, the quarterly dividend has again increased by 25% to $0.125. WU has maintained a stable financial profile while actively repurchasing shares since becoming a public company; however, the continuation of repurchases despite negative developments supports our view that the firm is taking an increasingly aggressive financial posture. Our ratings on WU are based on the strength of the company's premier money transfer franchise--still by far the market leader--its history and proven ability to generate strong and consistent cash flow and earnings, and its relatively low exposure to credit, interest rate, and liquidity risks. Outlook The outlook is negative. New competition and compliance changes create uncertainty over the next two years in terms of WU's market share, profitability, and cash flow. Specifically, WU's price-cutting strategy could lead to lower earnings for a sustained period. We could lower the ratings if WU loses market share, or cannot regain the stronger earnings and cash flows it has produced the past few years, following the declines we expect in 2013. The current rating also depends on WU's ability to fund its shareholder initiatives with cash flows. We expect debt to adjusted EBITDA will rise to mid-to-high 2x. We could lower the rating if debt to adjusted EBITDA exceeds 2.75x on a sustained basis. We could revise the outlook to stable if the company's pricing cuts result in an improved competitive position and the company maintains debt to adjusted EBITDA below 2.5x on a sustained basis. Related Criteria And Research Rating Finance Companies, March 18, 2004 Ratings List Downgraded; Ratings Affirmed Downgraded To From Western Union Co. (The) Issuer Credit Rating BBB+/Negative/A-2 A-/Stable/A-2 Senior Unsecured BBB+ A- Ratings Affirmed Western Union Co. (The) Commercial Paper A-2
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