-- Vendor selection for Neustar Inc.'s number portability
administration center (NPAC) contracts will be determined within the next 12
-- We are affirming our 'BB' corporate credit rating on the company and
revising the outlook to developing from stable.
-- The developing outlook reflects our expectation that we could either
raise or lower the ratings depending on the outcome of the vendor selection.
On Oct. 23, 2012, Standard & Poor's Ratings Services affirmed its 'BB'
corporate credit rating on Sterling, Va.-based Neustar Inc. and revised the
outlook to developing from stable.
The outlook revision is based on our expectation that within the next 12
months vendor selection for the number portability administration center
services (NPAC) contracts that Neustar currently services will be determined,
and the outcome could lead to an upgrade or downgrade of our ratings on the
company. If Neustar is successful in renewing the contract under favorable
terms, we could raise the ratings. This would provide Neustar revenue
stability beyond 2015 for about half of its business. Conversely, if the
company is unable to renew the NPAC contracts or renews with significant price
concessions, we could lower the ratings, since this could adversely affect
revenue and EBITDA levels and potentially result in higher leverage.
The ratings on Neustar reflect a business risk profile which Standard & Poor's
Ratings Services considers "fair," coupled with an "intermediate" financial
risk profile. The company benefits from a high degree of near-term
predictability for nearly 50% of its revenues, which derive from the NPAC
contracts. These include wireline and wireless number portability, managing
the allocation of pooled blocks of telephone numbers, and providing other
network management services in the U.S. under seven exclusive contracts
through June 2015 with an industry group representing all telecom service
providers in the U.S. These contracts include fixed fees, as well as some
We expect the request for proposal phase for the next NPAC contracts to begin
before the end of 2012 and the ultimate vendor to be selected in May 2013, at
the earliest. We believe that Neustar has reasonable prospects to retain these
contracts given its long-history of providing number portability services to
the telecommunications industry and its status as a neutral vendor, which is
an important component for the selection process.
Partial mitigating factors include a high degree of customer and industry
concentration, uncertain longer term growth prospects from newer business
lines, and consumer privacy and security risks inherent in all
customer-related data management businesses. Our ratings incorporate the
expectation that operating lease-adjusted leverage will remain in the 2x area
or below for the foreseeable future, with potential improvement dependent on
growth from newer business lines.
Apart from its core carrier services business, Neustar also provides domain
name services (DNS) to enterprise customers. The company manages these
directories to direct, prioritize, and manage Internet traffic. Revenues come
from initial set-up fees, monthly recurring fees, and usage-based fees for
transactions in excess of pre-established monthly minimums. Contracts in this
segment range from one to nine years. Neustar also provides common short codes
used by content aggregators that implement applications for media and content
companies. Additionally, the company provides a suite of DNS products for the
direction and management of Internet traffic, resolution of Internet
inquiries, and security protection. Collectively, enterprise services account
for about 20% of the Neustar's revenue, but also provide some good growth
In November 2011, the company acquired TARGUS Information Corp. for about $650
million in cash. TARGUS provides traditional caller ID services as well as
online information services, such as lead verification. A unique value
proposition for the business is to deliver clients with accurate real-time
information about whom they are interacting with (i.e., their customers), and
in some cases provide additional information to enhance the interaction. Its
proprietary data repository with key identifiers and demographic attributes
provides the company its competitive advantage and serves as the focal point
for all its products. While we do not expect TARGUS to offer any meaningful
operating synergies, the acquisition allows Neustar to diversify its revenue
base while providing a broader suite of services to its enterprise customers.
Total debt to last-quarter-annualized EBITDA as of June 30, 2012, was modest
at about 1.6x. Our rating incorporates the expectation that Neustar's leverage
will remain around 2x or lower on an ongoing basis, given our expectation for
modest growth in EBITDA although we believe that longer-term leverage
improvement could be constrained by an aggressive financial policy, including
share repurchases or debt-financed acquisitions. We expect that funds from
operations (FFO) to debt will be in excess of 35%, which is supportive of the
intermediate financial risk assessment. Moreover, we believe that the company
will generate free operating cash flow of at least $175 million annually given
the low capital intensity of its business. However, we assume that a
significant portion of the company's FOCF will be consumed by share
repurchases, and therefore have assumed no debt repayment beyond the bank
credit facility excess cash flow sweep and mandatory amortization.
We are revising our assessment of Neustar's liquidity to "strong" from
"adequate." Sources of liquidity include about $132 million of cash, an
undrawn $100 million senior secured revolver, and estimated FFO of at least
$200 million in 2012. We expect that cash uses will include about $55 million
to $60 million of capital expenditures, annual debt amortization of $6
million, and share repurchases, although the actual level of repurchases will
likely depend on FOCF generation. We expect sources of liquidity to exceed
uses by more than 2x over the next 12 months, and at least 1x coverage in the
12 months thereafter, and we expect sources to remain positive, even with a
30% decline in EBITDA.
The bank credit facility contains a maximum 2.5x total leverage covenant,
which steps down to 2.25x on March 31, 2013, and 1.0x fixed-charge covenant.
We expect the company will maintain at least a 30% cushion under its tightest
covenant over the next year.
The outlook is developing. We expect that the company's NPAC services will
provide stability and predictability to its overall base of business and
associated cash flows over at least the next year. However, we could raise the
ratings if the company is able to renew the NPAC contracts on favorable terms.
This would provide Neustar with revenue stability beyond 2015 for about half
of its business. A ratings upgrade would also be predicated on the company
maintaining an "intermediate" financial risk profile, including leverage of
Conversely, a downgrade could occur if Neustar is unable to renew the NPAC
contracts or if it renewed the contracts on significantly less favorable terms
than its prior contract, since this would adversely affect revenue and EBITDA
levels and could prompt us to revise downward our business and financial risk
assessment of the company. We could also lower the ratings if Neustar were to
materially modify its financial policy, including substantially increasing its
stock repurchase plans or pursuing material debt-financed acquisitions, such
that leverage were to increase to the mid-3x area or higher.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- U.S. Telecom And Cable Companies' Maturities Are Manageable, But
Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012
-- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10,
-- Assessing The Four-Notch Rating Gap Between The Two U.S.
Direct-To-Home Satellite Video Operators, May 9, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Ratings Affirmed, Recovery Ratings Unchanged; Outlook Action
Corporate Credit Rating BB/Developing/-- BB/Stable/--
Senior Secured BB+ BB+
Recovery Rating 2 2