Fitch Affirms Western Union's IDR at 'BBB+'; Outlook Revised to Stable

Fri Nov 8, 2013 4:34pm EST

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(The following statement was released by the rating agency) NEW YORK, November 08 (Fitch) Fitch Ratings has affirmed the Issuer Default Rating (IDR) and all senior unsecured ratings for The Western Union Company (Western Union) at 'BBB+'. The Rating Outlook has been revised to Stable from Negative. The ratings affirmation and Outlook reflect the following considerations: --Western Union's operating trends in the consumer to consumer (C2C) segment have stabilized after significant price cuts taken by the company in early 2013. In the September quarter, transaction growth was near 9% although C2C revenue declined 2% due to the price actions taken earlier in the year. --The company continues to generate solid free cash flow, $545 million in the LTM period, with a solid cash balance over $1.7 billion ($1.5 billion when adjusted for debt recently issued to partially refinance a February 2014 maturity). --Western Union raised its quarterly dividend at the end of 2012 and expects to repurchase approximately $400 million in stock during 2013. However, management recently stated publicly that it does not expect to have any significant repurchase activity in 2014 in order to preserve the company's credit ratings. --The company expects a significant increase in compliance costs in 2014 to negatively impact EBITDA margins and act as a partial headwind to revenue growth in 2014. Fitch expects EBITDA margins to settle at or above 25% and for revenue growth to be in the mid-single digits in 2014. If expectations for normalized EBITDA margins were to drop materially below 25%, due to either further increases in the company's expense structure or additional pricing pressures, that view would not be consistent with the current rating rationale. --Fitch expects that a continued rise in person to person electronic payment technologies, which primarily serve intra-country transfers, will act as a headwind to Western Union's revenue growth for the next several years. Intra-country transfers are less than 10% of Western Union's remittance business so the potential impact is limited. While Western Union does offer similar technology to these emerging products, many competitors have offered this service free as an adjunct to other service offerings. Fitch does not expect this competitive dynamic to impact cross-border remittances which are subject to much greater regulations. --Fitch expects leverage to range at or below 2.5x going forward. Current leverage is 2.58x after adjusting for the partial 2014 note refinancing. Fitch believes that Western Union's core business model remains intact as does its superior competitive position. Fitch believes that cash-based remittance, particularly on the receive side, will continue to represent the vast majority of the overall market which limits the potential competition from cash-less based remittance alternatives. As a result, Western Union's strength in breadth and scale of agent locations will likely remain fundamental to the business. Further, the company's scale advantage over other competitors enables it to compete at almost any price. For years there has been a debate of Western Union's strategy of maintaining its premium pricing and high margins versus gaining greater market share with lower prices. While management insists it will seek to maintain a premium priced product, the company has been forced to be more competitive on price. However, Fitch believes that the company will remain the dominant international remittance provider with strong margins and free cash flow as well as a high return on invested capital. This supports the high investment grade nature of the credit but also leads to significant event risk from investors looking to leverage the balance sheet. The prior Negative Outlook reflected in part Fitch's concern that there was a significant increase in event risk following the third quarter 2012 earnings announcement as the stock price declined nearly 30%. Fitch estimated at the time that Western Union was trading at a forward enterprise value to EBITDA multiple of approximately 6x. Fitch believed that this could lead to a potential third party leveraging event, either in the form of an LBO or an activist investor forcing a leveraged recapitalization of the company. While this risk still remains, Fitch believes it is lessened by the increase in the stock price and implied valuation over the past year. Of note, Fitch believes that all outstanding debt but the 5.93% senior unsecured notes due October 2016, the 5.253% senior unsecured notes due April 2020, and the 6.2% senior unsecured notes due November 2036 contain explicit change of control provisions. RATINGS DRIVERS Western Union's ratings and Outlook are supported by the following factors: --Extensive domestic and growing international agent network with a strong worldwide brand; --Revenue stability from strong global diversification and consumer exposure; and --An asset-light business model with a largely variable cost structure due to the company's network of agents which generally own and operate the retail locations. Credit concerns include: --New payment technologies could challenge traditional remittance services, particularly if certain economies broadly adopt cashless payments, but this trend will likely take years to materially impact Western Union, if at all; --The compliance risks associated with regulations governing Western Union's business in numerous jurisdictions worldwide. The company received a subpoena by the U.S. Attorney's Office in California in March 2012, related to an investigation against a former Western Union agent. The company was also notified that it is the subject of an investigation into structuring and money laundering. It is not possible to estimate the potential liability, if any, to the company from this action; --Significant foreign currency exposure given broad international diversification although natural hedges in the cost structure of the business essentially protect profitability as a percentage of revenue; --Event risk dominated by shareholder friendly actions as the ratings incorporate Fitch's expectation that Western Union will use the majority of its excess free cash flow for stock buybacks and acquisitions; --Longer-term, Western Union is likely to face increased competition from regional and multi-national banks entering the remittance market. However, Western Union's relatively unique customer base represents a potential asset to financial institutions looking to offer traditional services to migrant workers which the company may be able to monetize in the future; --The risk of adverse political environments or legislation impacting migration flows although this risk is mitigated by Western Union's broad geographic diversification. Liquidity as of Sept. 30, 2013 was solid with cash of $1.7 billion and a fully available $1.65 billion senior unsecured revolving credit facility, expiring January 2017, which fully supports Western Union's $1.5 billion 4(2) commercial paper program. In addition, free cash flow was approximately $545 million over the latest 12 month period. Total debt as of Sept. 30, 2013 was $4 billion consisting principally of $500 million in 6.5% senior unsecured notes due February 2014; $250 million floating rate senior unsecured notes due August 2015; $250 million in 2.375% senior unsecured notes due December 2015; $1 billion in 5.93% senior unsecured notes due October 2016; $500 million in 2.875% senior unsecured notes due December 2017; $400 million in 3.65% senior unsecured notes due August 2018, $325 million in 5.253% senior unsecured notes due April 2020; $500 million in 6.2% senior unsecured notes due November 2036; and $250 million in 6.2% senior unsecured notes due June 2040. The $250 million in floating rate notes due 2015 were issued to refinance in part the notes maturing in 2014. Fitch has affirmed Western Union's ratings as follows: --IDR at 'BBB+'; --Senior unsecured at 'BBB+'; --Senior unsecured credit facility at 'BBB+'; --Short-term IDR at 'F2'; --Commercial paper (CP) program at 'F2'. The Rating Outlook is Stable. RATINGS SENSITIVITIES Future developments that may, individually or collectively, lead to negative rating action include: --The potential for Western Union to increase leverage to fund future acquisitions or shareholder friendly actions; --A further decline in EBITDA profit margins due to additional pricing pressures which would suggest a more significant and prolonged competitive challenge than what is currently factored into the ratings. Future developments that may, individually or collectively, lead to positive rating action include: --A sustained rebound in EBITDA margins coupled with high single digit revenue growth over several years. Contact: Primary Analyst Jason Paraschac, CFA Senior Director +1-212-908-0746 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Kenny O'Trakoun Analyst +1-212-908-0637 Committee Chairperson Jamie Rizzo, CFA Managing Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology', dated Aug. 5, 2013. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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