TEXT-S&P rates Dun & Bradstreet notes 'BBB+', outlook is stable
Overview -- U.S.-based commercial information products company, The Dun & Bradstreet Corp. plans to issue between $500 million and $700 million senior unsecured notes across a five-year and 10-year maturity. -- The company will use proceeds from the proposed notes to refinance its existing $400 million notes due 2013, and to repay a portion of borrowings under its revolving credit facility. -- We are affirming our 'BBB+' corporate credit rating on the company. At the same time, we are assigning the proposed notes an issue-level rating of 'BBB+'. -- The stable outlook reflects our expectation that the company's leverage will remain below 3x, the threshold for the 'BBB+' rating. Rating Action On Nov. 28, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term corporate credit rating and 'A-2' short-term rating on Short Hills, N.J.-based The Dun & Bradstreet Corp. (D&B). The outlook is stable. At the same time, we assigned the company's proposed senior unsecured notes due 2017 and 2022 our 'BBB+' issue-level rating. Rationale The rating reflects our expectation that D&B will maintain its ratio of lease-adjusted debt to EBITDA at or less than our maximum threshold of 3x for the 'BBB+' rating over the long term, and our assumption that management will fund its share repurchases with discretionary cash flow and cash balances, rather than debt. We expect the company to use the net proceeds from the notes to redeem the existing $400 million 6% notes due April 1, 2013, and repay a portion of the $320 million of borrowings outstanding under its revolving credit facility as of Sept. 30, 2012. Pro forma for the proposed notes offering, lease- and pension-adjusted debt to EBITDA was roughly 2.9x for the 12 months ended Sept. 30, 2012, slightly below our 3x threshold for the rating. Our base-case forecast assumes that debt leverage will remain in the high-2x area through 2013, given the company's plans to repurchase roughly $734 million of its shares by the end of 2014. We view D&B's business risk profile as "satisfactory," based on our criteria, because of its leading market position in business information services and high barriers to entry, despite recent slightly reduced visibility and revenue stability. D&B has an "intermediate" financial risk profile, in our view, because of its good cash flow and moderate leverage, which are balanced by a sizable share-buyback program. D&B provides credit information products that help business customers in 200 countries manage risk exposure and enhance sales and marketing efforts. Our reassessment of D&B's business risk profile as satisfactory is based on high barriers to entry in its markets because of the size and quality of its database and geographic reach, and its leading market position in third-party business information, despite having a number of niche and established competitors. The company's high percentage of subscription-based revenue provides some stability and visibility to its earnings throughout the economic cycle. Nevertheless, budgetary pressures and economic weakness have recently caused some customers to shift from subscription-based plans to usage-based plans at the company's North American risk management segment. The company's business risk profile also benefits from good operating efficiencies, which it has achieved through a series of ongoing investments and restructuring measures. The company's undiversified business base modestly offsets these strengths. Under our base-case scenario, we expect D&B's 2012 and 2013 revenue and EBITDA to grow at a low-single-digit percent rate. We expect most of the growth will continue to come from the company's markets outside of North America. We expect operating expenses will be down at a low-single-digit percent rate in 2013. We also expect the company will direct a substantial portion, if not all, of its discretionary cash flow to share repurchases. For the 12 months ended Sept. 30, 2012, the EBITDA margin was 30.3%, up from 29.8% for the same period last year. We expect modest margin expansion in 2013, supported by lower technology investment spending, if new product launches gain momentum. During the third quarter of 2012, operating performance was within our expectations. D&B's revenue (excluding divested operations) increased 0.6%, year over year, mainly because of growth in products and services and an acquisition in the fourth quarter of 2011. Risk management segment revenue (roughly 65% of total core revenue in the quarter) declined approximately 2.5% during the quarter because of a decrease in project- and usage-based subscription revenue. EBITDA increased 6.9% during the quarter, reflecting decreased restructuring charges related to divested businesses and lower compensation costs. In May 2012, D&B said practices at Roadway may have violated the Foreign Corrupt Practices Act (FCPA) and local consumer data privacy laws in China. Roadway contributed roughly $22 million of revenue, but only about $2 million of operating income. D&B has shut down the business, having self-reported the potential FCPA violations to the Securities Exchange Commission (SEC) and Department of Justice (DOJ). On Sept. 28, 2012, The Shanghai District Prosecutor charged Roadway with illegally obtaining private information on Chinese citizens. A criminal fine will likely be imposed on Roadway. The timing of a resolution and the size of any penalties are uncertain. D&B has good cash flow generating ability. Conversion of EBITDA into discretionary cash flow was 39% for the 12 months ended Sept. 30, 2012. Capital spending and shareholder dividends are moderate, currently 13.8% and 13.3%, respectively, of EBITDA. We expect share repurchases to consume all of D&B's discretionary cash flow in 2012 and 2013, up from 82% during 2011. Liquidity We regard D&B's liquidity profile as "adequate," based on the following expectations and assumptions: -- For the next 12 to 18 months, we expect liquidity sources to exceed uses by more than 1.2x. -- We expect net sources to remain positive, even if EBITDA declines by 15% to 20%. -- Because of D&B's good conversion of EBITDA to discretionary cash flow, we believe it could absorb low-probability, high-impact shocks. -- D&B has well-established relationships with its banks and a generally high standing in the credit markets. The short-term rating on D&B is 'A-2'. Sources of liquidity include $137 million of cash balances as of Sept. 30, 2012; pro forma for the transaction, access to nearly the entire $800 million revolving credit facility due in 2016; and expected funds from operations of about $350 million to $375 million in 2013. We expect cash uses to consist of manageable working capital needs, about $75 million to $85 million of capital expenditures, and roughly $70 million to $75 million of dividends in 2012 and 2013. As a result, we expect D&B to generate discretionary cash flow between $200 million and $225 million in 2013. D&B likely will direct a substantial portion, if not all, of its discretionary cash flow to share repurchases and, potentially, acquisitions. In August 2012, the board approved an additional $500 million share repurchase program for a total program authorization of $1 billion. As of Sept. 30, 2012, the company had $734 million of shares remaining and plans to complete the share repurchase program in 2014. Apart from the $400 million notes due April 2013, which the company will redeem with a portion of proceeds from the proposed notes, the company's next debt maturities are for its $300 million senior notes due March 2015 and its revolving credit facility due in October 2016. We do not anticipate any difficulty in the company refinancing these maturities. Outlook Our stable rating outlook reflects our expectation that over the intermediate to long term, D&B will maintain its lease-adjusted debt to EBITDA within our 3x maximum threshold, which we consider appropriate for a 'BBB+' rating. We could lower the rating if weak operating performance and debt-funded share repurchases cause leverage to rise above 3x over the intermediate term with no expectation of returning below our leverage threshold. Specifically, share repurchases of roughly $275 million per year, on a sustained basis, would likely lead the company to borrow under the revolver, in our view, causing the debt leverage to increase above 3x in 2013 and beyond. The potential for a rating upgrade is minimal, given D&B's focus on shareholder returns and slightly lower revenue visibility and resilience. A rating upgrade would likely result from D&B moderating leverage to the low-2x area, and expressing and adhering to a commitment to a more conservative financial policy. 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 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Dun & Bradstreet Corp. (The) Corporate Credit Rating BBB+/Stable/A-2 New Rating Dun & Bradstreet Corp. (The) Senior unsecured notes due 2017 BBB+ Senior unsecured notes due 2022 BBB+ 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.
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