TEXT - S&P rates BATS Global Markets Inc
(The following statement was released by the rating agency) Overview -- BATS Global Markets Inc. is seeking to issue $350 million senior secured credit facilities, consisting of a $300 million, six-year first-lien term loan and a $50 million, three-year revolver, undrawn at close. -- The company will use proceeds from the issuances to fund an approximate $300 million dividend to its shareholders. -- We are assigning a 'BB-' corporate credit rating on BATS and a 'BB-' issue rating on the company's $350 million senior secured credit facilities. -- The stable outlook reflects our expectation that BATS will maintain its market share and current operating performance. Rating Action On Nov. 27, 2012, Standard & Poor's Ratings Services assigned its 'BB-' corporate credit rating on BATS Global Markets Inc. The outlook is stable. At the same time, we assigned our 'BB-' issue rating on the company's $350 million senior secured credit facilities. Rationale Standard & Poor's ratings on BATS reflect the company's status as the third-largest stock exchange in the U.S. and the largest pan-European equities trading venue. The company has a well-diversified customer base, with no single customer contributing more than 8% of trading volume. BATS' scalable technology platform, which we view as a positive ratings factor, has enabled it to rapidly grow its market share by pursuing an aggressive pricing strategy. However, several negative factors counteract these strengths. BATS still depends on U.S. cash equity trading volume, even though it has been expanding into new geographies and asset classes. Following a planned dividend payment, the company will have negative tangible equity and high debt leverage. Additionally, we believe that BATS is highly vulnerable to operational risk. BATS develops and operates electronic markets for the trading of listed cash equity securities in the U.S. and Europe and listed equity options in the U.S. With average trading volumes (ADV) in U.S. equities of 815 million shares and average daily notional value (ADNV) in European equities of EUR6.8 billion, BATS had a 12.5% market share in U.S. equities and a 23.7% market share in European equities as of the third quarter ended Sept. 30, 2012. BATS' main sources of revenue are transaction fees, market data fees, and port fees. Although the company has been diversifying its revenue sources, it is still heavily dependent on the U.S. equity markets' trading volumes. For the nine months ended Sept. 30, BATS reported $171 million of total revenue, 78% of which came from U.S. equities. European equities and U.S. options contributed 15% and 7%, respectively. The company's transaction fee contribution, which was 62% year-to-date 2012, is considerably higher than that of peers'. BATS' pretax operating margin was 26.5% in the nine months ended Sept. 30, up significantly from 18.8% for full-year 2011. The EBITDA margin also increased, to 36.5% from 25.6%, over the same period. Profitability was up mainly because of an increase in net capture and the Chi-X Europe merger, from which BATS extracted significant cost savings. Despite these improvements, profitability metrics still compare unfavorably with those of most exchanges that we rate. We view BATS' liquidity and funding as adequate. As of Sept. 30, 2012, the company had $49.6 million of cash and cash equivalents and $81.1 million in financial instruments consisting of highly liquid U.S. Treasury securities. Adjusted for a $65 million contingent liability related to the Chi-X acquisition due in fourth-quarter 2012 and $10 million in transaction financing-related expenses, BATS' available liquidity would be $55.7 million, covering almost seven months of operating expenses. The $50 million revolver that the company is planning to add will further improve its liquidity profile. As of Sept. 30, 2012, BATS had no outstanding debt. The company is planning to issue $350 million senior secured credit facilities, consisting of a $300 million, six-year first-lien term loan and a $50 million, three-year revolver, undrawn at close. The company will use proceeds to fund a $300 million dividend to BATS shareholders and for general corporate purposes. The borrower is BATS Global Markets Inc., and its direct and indirect subsidiaries will guarantee the loan. Adjusted for the new debt issuance, pro forma debt leverage (based on annualized year-to-date EBITDA) and EBITDA interest coverage would be 3.6x and 4.4x, respectively, as of Sept. 30. Both of these metrics compare unfavorably with those of other exchanges we rate. BATS had $130 million in tangible equity as of Sept. 30, 2012. Adjusted for the dividend transaction, pro forma tangible equity would be negative $177 million. Although our credit analysis for exchanges focuses more on cash flow than balance sheet leverage, we expect regulated entities to maintain sufficient tangible equity to cover unexpected losses. BATS, like other exchanges, is highly exposed to operational risk. This became evident in spring 2012, when it suffered the worst technical glitch in its seven-year history that prevented it from taking its own shares public on its own exchange. As the software glitch disrupted trading within seconds of its debut, BATS decided to withdraw its IPO. The IPO failure hurt BATS' reputation, but the overall damage to the company was relatively limited. BATS continued to increase its market share, and it's not facing any pending litigation related to the IPO. Unlike Facebook's IPO fiasco on the NASDAQ, neither BATS' members nor investors suffered losses. Outlook The stable outlook reflects our expectation that BATS will be able to maintain its market share and current operating performance. If BATS can reduce its debt, bringing debt leverage to less than 3.0x, and maintain or grow its market share while introducing a new pricing structure that could improve its profitability, we would consider upgrading the company. On the other hand, if BATS' profitability and key credit metrics deteriorate following the debt issuance, we could lower the rating. We could also consider downgrading the company if it encounters another operational problem or decides to pay another large dividend. Related Criteria And Research Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, July 10, 2006 Ratings List New Rating; Outlook Action BATS Global Markets Inc. Issuer Credit Rating BB-/Stable/-- New Ratings BATS Global Markets Inc. $300 million Senior Secured First Lien due 2018 BB- $50 million Senior Secured Revolver due 2015 BB- (Caryn Trokie, New York Ratings Unit)
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