Fitch Rates Pitney Bowes' Proposed Senior Unsecured Notes 'BBB-'

Wed Mar 5, 2014 10:14am EST

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(The following statement was released by the rating agency) NEW YORK, March 05 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Pitney Bowes' (PBI) $500 million senior unsecured notes due 2024. PBI and its subsidiary, Pitney Bowes International Holdings, Inc. (PBIH) have an Issuer Default Rating (IDR) of 'BBB-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. The new notes will rank pari passu with existing senior unsecured securities. The proposed notes include a change of control put offer of 101% upon a change of control and subsequent downgrade of the notes to non-investment grade. A change of control includes any person/entity acquiring 50% or more of the voting control of the company, majority of directors of the board cease to be continuing directors, or a sale 85% or more of PBI's total consolidated assets in one, or a series, of transactions. The proposed notes also include a limitation on liens of up to 15% of consolidated net tangible assets (in addition to standard carve outs). The proceeds of the new notes are expected to fund a cash tender offer (announced yesterday) for an aggregate principal amount of $500 million of notes with the following order of priorities: 1) 5.25% notes due 2037, $500 million outstanding; 2) 5.75% notes due 2017, $500 million outstanding; 3) 4.75% notes due 2016, $371 million outstanding; 4) 4.75% notes due 2018, $350 million outstanding; 5) 5.60% notes due 2018, $250 million outstanding. The tender offer expires on March 31, 2014. Notes that are tendered on or before March 17, 2014 would receive an additional $30 in premium for every $1,000 tendered. Total consideration for the Notes due 2037 (Priority 1 Notes) is $1,110 ($1,080 excluding the premium described above). Total consideration for Priority Notes 2 to 5 will be based upon a fixed spread over the yield to maturity of applicable U.S. Treasury Securities as specified in the Offer to Purchase and Letter of Transmittal documents. Fitch views the transaction as credit neutral as pro forma credit metrics remain materially unchanged. If all of the 2037 notes accept the tender offer, $500 million in debt will shift to an earlier maturity bucket. KEY RATING DRIVERS The ratings are supported by: the significant and entrenched market position in the core U.S. Mailing business; the necessity of mail equipment and services to conduct business across all industries; and the diversity of the company's customer base, from both an industry and size perspective. PBI has stated its commitment to investment grade metrics, although these metrics and their levels have not been defined. Fitch believes that the actions taken in 2013 demonstrate that PBI is committed to maintaining investment grade ratings. These actions include the reduction in its quarterly dividend from $0.375 to $0.1875 per share, a 50% reduction, resulting in a saving of approximately $150 million per year. In addition, the company used proceeds from the sale of its Management Services business to redeem its $300 million in senior notes due in 2014. Over the last two years, PBI has reduced its total debt from $4.5 billion in 2011 to $3.6 billion at the end of 2013 (totals include PBIH's preferred security). Fitch-calculated unadjusted gross leverage has declined from 4.7x in 2011 to approximately 4.3x (leverage metrics for both periods are pro forma for operating divestures), and core leverage has declined a full turn over the same period. Fitch expects 2014 year-end total leverage to remain at 4.3x. Fitch is not expecting material acquisition or share buyback activity, and there is limited room within the ratings for any share buyback activity. Any debt-funded share buyback activity or a material debt-funded acquisition would be outside of current ratings. Fitch continues to be concerned with the continued revenue declines. Enterprise business ended the 2013 year up 3.5% and digital commerce solutions was up 3.1%. However, these gains were unable to fully offset the declines in the North American small- and medium-sized businesses, which was down 5.3%. Total revenue for 2013 was down 1.2%. Fitch notes that in the last three quarters, PBI has delivered positive year-over-year revenue growth in equipment sales. Continued positive growth in equipment sales could lead to improved financing, rental and supply revenues. PBI has provided revenue guidance of down 1% to up 2%, on a constant currency basis; Fitch believes this is achievable. There is limited room in the ratings for PBI to fall short on these revenue expectations. Ratings concerns include the secular and cyclical pressures inherent to the business and top-line declines. The ratings also consider event risk, faced by bondholders of all companies faced with secular challenges and underperforming equity, of a potentially more aggressive financial policy and capital structure. Fitch believes cyclical pressures accelerate the well-documented secular challenges, as customers could look to digital mailing as a cost-reduction mechanism, and choose to keep existing equipment. The acceleration of digital substitution for physical transaction mail results in reduced need for PBI's mailing equipment. Although the majority of PBI's revenue is not directly tied to mail volume, Fitch believes continued mail volume declines could drive reduced equipment needs, whether in terms of size, number or functionality. PBI's initiatives to position itself more as a digital and services company could gain traction. That said, in the near term, these initiatives will be challenged in offsetting the declines in the high-margin North American mailing space. These products could cannibalize existing physical business, but Fitch believes such a strategy is unavoidable, given ongoing digital substitution. Liquidity PBI's liquidity position at Dec. 31, 2013 was solid, consisting of: $908 million of cash; and an undrawn $1 billion revolving credit facility maturing in April 2016, which backstops the company's $1 billion commercial paper program. Liquidity is further supported by the company's annual free cash flow (FCF) generation. Fitch calculates 2013 FCF at $280 million. Fitch's current base case projections estimate annual FCF at $200 million-$250 million for the next few years. Fitch's FCF calculation deducts PBI's common and preferred dividend payments and does not add back cash flows associated with restructuring payments, and tax payments related to sales of leveraged lease assets. PBI faces material annual maturities over the next several years. However, Fitch recognizes that the company can address a significant portion of its maturities organically with its pre-dividend FCF generation. As of Dec. 31, 2013, PBI's total debt was $3.6 billion. Fitch estimates that this consists of: --$3.1 billion of senior unsecured debt, maturing between 2015-2022 ($2.2 billion), one maturing in 2037 ($500 million) and one maturing in 2043 ($425 million); --$230 million in term loans due in 2015/2016; --$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). RATING SENSITIVITIES Positive: Given the secular challenges facing the company, Fitch does not expect positive rating momentum in the near term. Sustainable revenue growth driven by the company's various product initiatives coupled with a commitment to continue reducing absolute levels of debt may drive positive rating momentum. 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 mid- to high-single-digits would pressure the ratings; --A sustained increase in total leverage from current levels, whether the result of incremental debt or lower EBITDA; --Indications of a more aggressive financial policy. Fitch currently rates Pitney Bowes as follows: Pitney Bowes --IDR 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'; --Senior unsecured term loan 'BBB-'; --Senior unsecured notes 'BBB-'; --Short-term IDR 'F3'; --Commercial paper 'F3'. PBIH --Long-term IDR 'BBB-'; --Preferred stock 'BB'. The Outlook is Stable. Contact: Primary Analyst Rolando Larrondo Senior Director +1-212-908-9189 Fitch Ratings, Inc. One State Street Plaza New York, New York 1000 Secondary Analyst David Peterson Senior Director +1-212-908-0223 Committee Chairperson Steven Marks Managing Director +1-212-908-9161 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 & Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis – Effective Dec. 15, 2011 to Dec. 13, 2012 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. 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