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TEXT - S&P rates BATS Global Markets Inc
November 27, 2012 / 5:41 PM / 5 years ago

TEXT - S&P rates BATS Global Markets Inc

(The following statement was released by the rating agency)

Overview
     -- BATS Global Markets Inc. is seeking to issue $350 million
senior secured credit facilities, consisting of a $300 million, six-year
first-lien term loan and a $50 million, three-year revolver, undrawn at close.
     -- The company will use proceeds from the issuances to fund an 
approximate $300 million dividend to its shareholders.
     -- We are assigning a 'BB-' corporate credit rating on BATS and a 'BB-' 
issue rating on the company's $350 million senior secured credit facilities.
     -- The stable outlook reflects our expectation that BATS will maintain 
its market share and current operating performance. 

Rating Action
On Nov. 27, 2012, Standard & Poor's Ratings Services assigned its 'BB-' 
corporate credit rating on BATS Global Markets Inc. The outlook is stable. At 
the same time, we assigned our 'BB-' issue rating on the company's $350 
million senior secured credit facilities.

Rationale
Standard & Poor's ratings on BATS reflect the company's status as the 
third-largest stock exchange in the U.S. and the largest pan-European equities 
trading venue. The company has a well-diversified customer base, with no 
single customer contributing more than 8% of trading volume. BATS' scalable 
technology platform, which we view as a positive ratings factor, has enabled 
it to rapidly grow its market share by pursuing an aggressive pricing 
strategy. However, several negative factors counteract these strengths. BATS 
still depends on U.S. cash equity trading volume, even though it has been 
expanding into new geographies and asset classes. Following a planned dividend 
payment, the company will have negative tangible equity and high debt 
leverage. Additionally, we believe that BATS is highly vulnerable to 
operational risk. 

BATS develops and operates electronic markets for the trading of listed cash 
equity securities in the U.S. and Europe and listed equity options in the U.S. 
With average trading volumes (ADV) in U.S. equities of 815 million shares and 
average daily notional value (ADNV) in European equities of EUR6.8 billion, BATS
had a 12.5% market share in U.S. equities and a 23.7% market share in European 
equities as of the third quarter ended Sept. 30, 2012.

BATS' main sources of revenue are transaction fees, market data fees, and port 
fees. Although the company has been diversifying its revenue sources, it is 
still heavily dependent on the U.S. equity markets' trading volumes. For the 
nine months ended Sept. 30, BATS reported $171 million of total revenue, 78% 
of which came from U.S. equities. European equities and U.S. options 
contributed 15% and 7%, respectively. The company's transaction fee 
contribution, which was 62% year-to-date 2012, is considerably higher than 
that of peers'.

BATS' pretax operating margin was 26.5% in the nine months ended Sept. 30, up 
significantly from 18.8% for full-year 2011. The EBITDA margin also increased, 
to 36.5% from 25.6%, over the same period. Profitability was up mainly because 
of an increase in net capture and the Chi-X Europe merger, from which BATS 
extracted significant cost savings. Despite these improvements, profitability 
metrics still compare unfavorably with those of most exchanges that we rate. 

We view BATS' liquidity and funding as adequate. As of Sept. 30, 2012, the 
company had $49.6 million of cash and cash equivalents and $81.1 million in 
financial instruments consisting of highly liquid U.S. Treasury securities. 
Adjusted for a $65 million contingent liability related to the Chi-X 
acquisition due in fourth-quarter 2012 and $10 million in transaction 
financing-related expenses, BATS' available liquidity would be $55.7 million, 
covering almost seven months of operating expenses. The $50 million revolver 
that the company is planning to add will further improve its liquidity 
profile. 

As of Sept. 30, 2012, BATS had no outstanding debt. The company is planning to 
issue $350 million senior secured credit facilities, consisting of a $300 
million, six-year first-lien term loan and a $50 million, three-year revolver, 
undrawn at close. The company will use proceeds to fund a $300 million 
dividend to BATS shareholders and for general corporate purposes. The borrower 
is BATS Global Markets Inc., and its direct and indirect subsidiaries will 
guarantee the loan. Adjusted for the new debt issuance, pro forma debt 
leverage (based on annualized year-to-date EBITDA) and EBITDA interest 
coverage would be 3.6x and 4.4x, respectively, as of Sept. 30. Both of these 
metrics compare unfavorably with those of other exchanges we rate. 

BATS had $130 million in tangible equity as of Sept. 30, 2012. Adjusted for 
the dividend transaction, pro forma tangible equity would be negative $177 
million. Although our credit analysis for exchanges focuses more on cash flow 
than balance sheet leverage, we expect regulated entities to maintain 
sufficient tangible equity to cover unexpected losses.

BATS, like other exchanges, is highly exposed to operational risk. This became 
evident in spring 2012, when it suffered the worst technical glitch in its 
seven-year history that prevented it from taking its own shares public on its 
own exchange. As the software glitch disrupted trading within seconds of its 
debut, BATS decided to withdraw its IPO. The IPO failure hurt BATS' 
reputation, but the overall damage to the company was relatively limited. BATS 
continued to increase its market share, and it's not facing any pending 
litigation related to the IPO. Unlike Facebook's IPO fiasco on the NASDAQ, 
neither BATS' members nor investors suffered losses. 

Outlook 
The stable outlook reflects our expectation that BATS will be able to maintain 
its market share and current operating performance. If BATS can reduce its 
debt, bringing debt leverage to less than 3.0x, and maintain or grow its 
market share while introducing a new pricing structure that could improve its 
profitability, we would consider upgrading the company. On the other hand, if 
BATS' profitability and key credit metrics deteriorate following the debt 
issuance, we could lower the rating. We could also consider downgrading the 
company if it encounters another operational problem or decides to pay another 
large dividend.

Related Criteria And Research
Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, 
July 10, 2006

Ratings List
New Rating; Outlook Action

BATS Global Markets Inc.
 Issuer Credit Rating                                       BB-/Stable/--      

New Ratings

BATS Global Markets Inc.
 $300 million Senior Secured First Lien due 2018            BB-                
 $50 million Senior Secured Revolver due 2015               BB-

 (Caryn Trokie, New York Ratings Unit)

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