October 23, 2012 / 8:15 PM / in 5 years

TEXT-S&P revises Neustar outlook to developing

Overview
     -- Vendor selection for Neustar Inc.'s number portability
administration center (NPAC) contracts will be determined within the next 12
months.
     -- 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.

Rating Action
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.

Rationale
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 
annual escalators.

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 
potential.

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.

Liquidity
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.

Outlook
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 
around 2x.

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, 
2012
     -- 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 List

Ratings Affirmed, Recovery Ratings Unchanged; Outlook Action
                                        To                 From
Neustar, Inc.
 Corporate Credit Rating                BB/Developing/--   BB/Stable/--
 Senior Secured                         BB+                BB+
   Recovery Rating                      2                  2

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