TEXT - Fitch cuts Pitney Bowes issuer default rating

Mon Feb 4, 2013 5:48pm EST

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Feb 4 - Fitch Ratings has downgraded the Issuer Default Rating of Pitney
Bowes Inc. (Pitney Bowes) and its subsidiary, Pitney Bowes International
Holdings, Inc. (PBIH) to 'BBB-' from 'BBB'. The Rating Outlook 
remains Negative. A full list of ratings actions follows at the end of this 
release.

The downgrade is based on Fitch's view that the secular challenges faced by 
Pitney Bowes, combined with the cyclicality inherent in the business, and the 
current credit protection metrics and free cash flow profile, are more 
commensurate with a 'BBB-' rating. 

Fitch's primary concerns continue to be the revenue declines endured by the 
company and the resulting impact on cash flows. The company reported revenues 
declines of 4.3% for the year. Fitch notes that revenues were down 1.4% for the 
fourth quarter, which is a moderation from the declines in the prior three 
quarters. Fitch models the Small & Medium mailing business (SMB; 51% of revenues
and down 6.5% in 2012) to continue to endure mid to low-single digit revenue 
declines for the foreseeable future. 

The Enterprise business segment (49% of revenues) was down 1.8%. This is 
concerning as Fitch looks to Enterprise as one of the areas to at least 
partially offset the declines in SMB. Further, the decline in equipment sales 
(which drives future financing, rental, and supplies revenue) was down 5% for 
the year. Fitch acknowledges that some of the production mail declines could be 
temporary due to macroeconomic-driven customer deferrals, and lower new small 
business starts are pressuring SMB. That said, Fitch believes this points to the
level of cyclicality and volatility in the business. 

Fitch calculates actual 2012 FCF at $163 million. This is both less than Fitch's
base case expectations and is outside of Fitch's downside scenario 
(approximately $200 million) incorporated in the previous ratings. Fitch's 
current base case projections estimate annual free cash flow at $200 
million-$225 million for the next few years. 

Fitch's FCF calculation deducts Pitney Bowes common and preferred dividend 
payments ($320 million) and does not add back cash flows associated with pension
contributions ($95 million), restructuring payments ($75 million), and tax 
payments related to sales of leveraged lease assets ($114 million).

 

The ratings also consider the event risk, which is faced by bondholders of all 
companies faced with secular challenges and underperforming equity, of a 
potentially more aggressive financial policy and capital structure. The ratings 
incorporate the potential for moderate acquisition and share buyback activity 
that is limited to free cash flow. Any such debt-funded activity would be 
outside of current ratings and likely lead to negative rating actions. 

Fitch estimates that total consolidated gross leverage at Dec. 31, 2012 was 3.9 
times (x) an improvement from 2011's 4.2x. This excludes $340 million in debt 
recently issued to prefund the June 2013 $375 million senior unsecured note 
maturity. The company reduced absolute debt by $550 million in 2012, which 
improved core leverage by a half a turn. 

Pitney Bowes faces material annual maturities over the next several years. Fitch
recognizes that Pitney Bowes can address its maturities organically with its 
pre-dividend FCF generation. The company appointed its new President and CEO in 
December of 2012 and has indicated that they will provide more information 
related to its capital deployment at its investor meeting in May 2013. Ratings 
may be stabilized if the company articulates a conservative financial policy, 
including a consolidated leverage target of less than 4x. The Negative Outlook 
reflects Fitch's concern that acquisition activity and shareholder friendly 
actions may consume a material amount of the company's pre-dividend FCFs.

Pitney Bowes' market share and entrenched position and the contractual finance 
receivable base have allowed the company to carry higher than average leverage 
for the rating category. Ongoing declines in the overall top line could 
encourage Fitch to further tighten its leverage parameters in a given ratings 
category.

The ratings are supported by: the significant and entrenched market position in 
the core U.S. Mailing business, characterized by approximately 80% share of the 
postage meter market and limited competitive pressures; the necessity of mail 
equipment and services to conduct business across all industries; the diversity 
of the company's customer base, from both an industry and size perspective; and 
the company's strong credit risk management policies regarding its financial 
services business.

Liquidity

Pitney Bowes' liquidity position at Dec. 31, 2012 was solid, consisting of: i) 
$913 million of cash; and ii) an undrawn $1 billion revolving credit facility 
(RCF) maturing in April 2016, which backstops the company's $1 billion 
commercial paper (CP) program. Liquidity is further supported by the company's 
annual free cash flow generation.

As of Dec. 31, 2012, Pitney Bowes' total debt was $4.3 billion, consisting of 
i)$3.7 billion of senior unsecured debt, consisting of 10 notes maturing between
2013-2022 and one maturing in 2037 ($500 million); ii) $220 million in term 
loans due in 2015/2016; and iii) $300 million of variable-term voting preferred 
stock in the company's subsidiary, PBIH. Under Fitch's hybrid security criteria,
Fitch assigns 0% equity credit given the less than five-year maturity (based on 
the October 2016 call date). 

SENSITIVITY/RATING DRIVERS

In addition to the comments above, ratings may be stabilized if over the next 
one to two years Fitch has higher conviction that a successful roll-out of the 
digital and customer communications initiatives, in combination with growth in 
its enterprise services businesses, will offset declines in its physical 
business.

Negative: Future developments that may, individually or collectively, lead to a 
negative rating action include:

--Lack of traction in the company's digital initiatives and other growth 
businesses amid ongoing declines in the traditional physical business. Also, 
sustained revenue declines in the high single digits would pressure the ratings;


--A sustained increase in total leverage, whether the result of incremental debt
or lower EBITDA;

--Indications of a more aggressive financial policy.

Positive: The current Outlook is Negative. As a result, Fitch's sensitivities do
not currently anticipate a rating upgrade.

Fitch has downgraded the following ratings:

Pitney Bowes
--IDR to 'BBB-' from 'BBB';
--Senior unsecured revolving credit facility (RCF) to 'BBB-' from 'BBB';
--Senior unsecured term loan to 'BBB-' from 'BBB';
--Senior unsecured notes to 'BBB-' from 'BBB'
--Short-term IDR to 'F3' from 'F2';
--Commercial paper (CP) to 'F3' from 'F2'.

PBIH
--Long-term IDR to 'BBB-' from 'BBB'
--Preferred stock to 'BB' from 'BB+'.
The Outlook is Negative.
FILED UNDER:
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