We are also assigning the proposed senior unsecured notes a ‘CCC+’ issue-level rating, with a recovery rating of ‘6’, indicating our expectation for negligible (0 to 10%) recovery for senior unsecured noteholders in the event of a payment default.
We are also lowering our issue-level ratings on the company’s bank debt to ‘B+’ from ‘BB-’ and its senior unsecured notes to ‘B-’ from ‘B’. The recovery ratings on the company’s existing debt remain unchanged.
The corporate credit rating reflects our expectation that Igloo’s consolidated debt leverage will remain high, in the low- to mid-7x area over the next year. We regard Igloo as having a “satisfactory” business risk profile (based on our criteria), characterized by its leading position in securities pricing data and analytics, benefiting from somewhat high barriers to entry and a diversified client base. We assess the company’s financial risk profile as “highly leveraged” based on the company’s mid-7x leverage. We score Igloo’s management and governance as “fair.” Despite our expectation that management and the board of directors will be focused on returning value to its private equity stakeholders, we are not aware of any material deficiencies in the company’s internal controls or risk management.
Through operating subsidiary Interactive Data, Igloo provides financial market data, analytics, and related solutions to the financial services industry. The company’s pricing and reference data segment generates the majority of its revenue and EBITDA. Because information is typically fed directly into clients’ systems, switching to a competitor involves significant system changes. We believe that as long as Igloo is prudent with its pricing policy and can maintain its quality and service level, client defection is not a major near-term risk. Client retention is high, with annualized quarterly revenue retention averaging 94% since 2007. We believe these positives more than offset the company’s relatively smaller scale of operations compared with its larger peers.
Under our base-case scenario, we expect revenue to grow at a low- to mid-single-digit percentage rate in 2013, primarily reflecting organic growth in its flagship pricing and reference business. We expect EBITDA to decline at a high-single-digit percent rate as the company continues to invest in technology and growth. Additional assumptions include ongoing high demand from existing customers, as well as modest price increases. We expect trading solutions revenue to remain roughly flat, with growth in trading infrastructure services continuing to offset declines in real-time related product sales. Our base-case scenario assumes U.S. real GDP growth of 2.3% in 2013. Our outlook could improve or worsen based on the global economy and corporate budgets. We believe the EBITDA margin will contract about 300 basis points, but remain in the mid-30% area and ahead of most peers.
In the third quarter ended Sept. 30, 2012, organic revenue grew 1.4% year over year, driven by growth at the company’s pricing and reference data business. Actual revenue was flat and EBITDA fell 0.6% in the quarter. Results were below our expectations, largely because of a 2.6% organic revenue decline in trading solutions revenue and foreign exchange headwinds. The EBITDA margin for the 12 months ended Sept. 30, 2012, was roughly even with 2011, at 36.2%, and the margin remains slightly higher than peers’.
Pro forma consolidated lease-adjusted debt to EBITDA increased to 7.5x as of Sept. 30, 2012, from 7.1x in the same period last year, largely due the increase in debt related to the proposed dividend. This ratio is in line with the indicative debt-to-EBITDA ratio of greater than 5x for “highly leveraged” companies, under our criteria. Pro forma adjusted EBITDA coverage of interest was 1.8x for the period. Under our base-case scenario, we expect consolidated leverage will remain in the low- to mid-7x area over the next year with modest debt repayment offsetting lower EBITDA as a result of continued investment in the business. We expect EBITDA coverage of interest will remain in the high-1x area.
For the 12 months ended Sept. 30, 2012, Interactive Data converted about 33% of EBITDA into discretionary cash flow, slightly lower than the 43% rate of conversion in 2011 because of higher capital spending. Capital spending consumed about 20% of EBITDA in the 12 months ended Sept. 30, 2012. We expect discretionary cash flow to turn negative for the full year of 2012 as a result of the proposed dividend. We expect capital spending will consume about 15% to 20% of EBITDA in 2013 and that the conversion rate of EBITDA into discretionary cash flow will be in the 30% to 35% range in 2013 because of high capital spending levels and higher interest expense. We expect Igloo’s consolidated credit metrics to improve modestly in 2013 unless it undertakes a significant leveraging transaction or additional dividends. While we do not expect a major transformative acquisition, small tuck-in acquisitions are likely over the intermediate term and could limit Igloo’s ability to decrease debt leverage.
Igloo has “adequate” liquidity to meet its needs over the next 12 to 18 months. Our view of its liquidity profile incorporates the following expectations and assumptions:
-- We expect that the company’s sources of liquidity over the next 12-18 months will exceed its uses by 1.2x or more.
-- We expect that net sources would remain positive, even if EBITDA declines 15% to 20%.
-- We expect that the company would be able to maintain covenant compliance even with a 15% to 20% decrease in EBITDA.
-- Because of Igloo’s substantial consolidated cash balances and access to a currently undrawn revolving credit facility, we believe the company could absorb low-probability, high-impact shocks.
Liquidity sources include pro forma cash balances and short-term investments of about $180 million, our expectation of around $150 million to $175 million of funds from operations in 2013, and an undrawn $160 million revolving credit facility. Capital spending needs are manageable, at about $60 million to $70 million in 2013. Based on these expectations, and our assumption that Igloo will not pay additional dividends in 2013, we estimate it will generate between $80 million and $110 million in discretionary cash flow in 2013. Debt maturities are minimal; the proposed senior unsecured notes mature in 2017 and the term loan and unsecured notes mature in 2018.
Operating subsidiary Interactive Data had a 39% cushion against its total debt leverage covenant of 7.75x at Sept. 30, 2012, and a 47% cushion against its interest coverage covenant of 1.45x. Both covenants tighten through 2016, although we expect the leverage covenant will remain the tightest. We expect it to maintain adequate covenant headroom of at least 20% despite the scheduled tightening, as a result of debt reduction from excess cash flows and our expectation of EBITDA growth beyond 2013.
For the complete recovery analysis, see Standard & Poor’s recovery report on Igloo, to be published on RatingsDirect as soon as possible following the release of this report.
The stable rating outlook reflects our view that Igloo’s consolidated liquidity will remain adequate and that leverage will remain high. We currently view both an upgrade and a downgrade as unlikely over the intermediate term. We could raise the rating if the company is able to reduce debt to EBITDA below 6.5x on a sustained basis while maintaining adequate liquidity and establishing a more moderate financial policy focused on lower long-term leverage. This scenario would likely involve Igloo increasing core revenue at a low-single-digit percent rate, and repaying about $75 million of debt over the next few years.
We could lower the rating to ‘B-’ if adverse regulatory changes or macroeconomic trends squeeze revenue and EBITDA and pressure liquidity and covenant compliance.
Related Criteria And Research
-- Criteria For Assigning ‘CCC+', ‘CCC’, ‘CCC-', And ‘CC’ Ratings, Oct. 1, 2012
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 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
Interactive Data Corp.
Corporate Credit Rating B/Stable/-- B+/Stable/--
Senior Secured B+ BB-
Recovery rating 2 2
Senior Unsecured B- B
Recovery rating 5 5
New Rating; Outlook Action
Igloo Holdings Corp.
Corporate credit rating B/Stable/--
Igloo Holdings Corp.
$350 mil sr PIK toggle nts due 2017 CCC+
Recovery Rating 6