-- West Palm Beach, Florida-based FTI Consulting plans to issue
$300 million of senior unsecured notes due 2022. The company also plans to enter
into a new $350 million revolving credit facility due 2017.
-- We expect weakened operating performance and modest leverage reduction
over the next 12 months, following a peak in leverage at year-end 2012.
-- We are revising our rating outlook on FTI Consulting to negative from
stable and affirming the corporate credit rating at 'BB+'. We are assigning a
'BB' issue-level rating and a '5' recovery rating to the proposed notes. We
are not rating the revolver.
-- The negative outlook reflects the possibility that we could lower our
ratings on FTI Consulting if it becomes apparent that 2013 operating
performance will be weaker than our expectation, causing debt leverage to
On Nov. 9, 2012, Standard & Poor's Ratings Services revised its rating outlook
on FTI Consulting Inc. to negative from stable. The corporate credit rating
remains at 'BB+'.
At the same time, we assigned the company's proposed $300 million senior
unsecured notes due 2022 our 'BB' issue-level rating (one notch below the
corporate credit rating) with a recovery rating of '5', indicating our
expectation of modest (10% to 30%) recovery for lenders in the event of a
payment default. FTI Consulting will use the proceeds to refinance its
existing $215 million senior unsecured notes due 2016 and repay outstanding
revolver borrowings. As part of the transaction, FTI Consulting will enter
into a new $350 million revolving credit facility due 2014. We are not rating
the revolving credit facility.
Our 'BB+' corporate credit rating on FTI Consulting is based on our
expectation that debt leverage will stabilize to near 3x over the next 15-18
months through EBITDA growth and that covenant compliance will remain
adequate. Pro forma for the proposed transaction, FTI Consulting will have
substantial availability under its $350 million revolving credit facility and
about $125 million of cash and cash equivalents as of Sept. 30, 2012.
We view FTI's business risk profile as "fair" because of the company's
dependence on highly mobile and sought-after senior staff, and some earnings
variability associated with its restructuring practice. The restructuring
practice is a significant contributor to the company's overall revenues and
profitability, but its performance can exhibit volatility with business
cycles. Positive factors including FTI Consulting's segment diversity,
businesses not strictly tied to the economic cycle, and discretionary cash
flow generation support our assessment. We view the company as having
"significant" financial risk because of its aggressive acquisition growth
strategy and financial policy.
FTI Consulting has five main practice areas: forensics and litigation,
corporate finance/restructuring, technology, economic consulting, and
FTI Consulting's performance is highly dependent on its senior managing
directors, whose expertise is sought by clients, and whose work commands high
billing rates and often repeat engagements. Retaining these leaders is
critical to the company's reputation and success. Although the company has
been successful in retaining its most senior professionals, this will remain a
key factor that we will continue to monitor. Maintaining high utilization of
consultants and the ability to increase the hourly rate charged to clients are
additional factors essential to profitability growth. FTI Consulting has kept
utilization rates steady in recent years--about 70% to 80%, depending on the
segment--by reassigning some employees to new projects in different business
segments and reducing headcount to better match demand. The company has
expanded its service offerings over the past few years through acquisitions,
with increasing focus on certain specialized industries, such as energy,
health care, and telecommunications. This strategy has further strengthened
the company's competitive position.
Under our base-case scenario, we expect 2012 revenue to decline at a
low-single-digit percentage rate from 2011. In 2013 and 2014, we expect
revenue increases at a low- to mid-single-digit percentage pace. We forecast
2012 full-year EBITDA to decline at a low- to mid-teen percentage rate because
of staff reduction charges and weak performance in the technology, forensic
and litigation consulting, and strategic communications segments. We expect
low-teens percent EBITDA growth in 2013 (mainly as a result of the absence of
significant restructuring charges) and mid-single-digit percent growth in
2014. We believe the restructuring, forensic litigation, and economic
consulting practices will each grow in 2013 and 2014, which should offset
further decline in the technology segment.
We expect the EBITDA margin will recover somewhat over the next two to three
years but remain in the mid-teens percentage area. Recovery to the low-20%
level of 2009 is unlikely because of the current business mix (reduced
weighting in technology) and competitive pressures that are contracting the
technology segment's margins.
The restructuring business performed better than expected through the first
three quarters of 2012 as a result of opportunities in Europe and North
America. This, combined with the growth of the economic consulting practice,
largely offset softness at other business segments, particularly the
technology segment. During the third quarter of 2012, revenues decreased 6.7%
while EBITDA (excluding noncash special charges) fell 16.9%, reflecting higher
personnel costs. The technology practice's EBITDA margin has declined over the
past two years. The technology segment contributed about 18.5% of EBITDA for
the 12 months ended Sept. 30, 2012, down from about 23% for 2011. FTI
Consulting continues to see increased competition in the technology sector,
which has led to lower prices and volume. The EBITDA margin has steadily
declined over the past three years, and was 15.5% for the 12 months ended
Sept. 30, 2012. The margin decline has been the result of one-time staff
reduction expenses, pricing pressure in the technology segment, increased
spending, higher compensation expenses, and lower margins at acquired
Pro forma for the proposed transactions, for the 12 months ended Sept. 30,
2012, the ratio of total debt to EBITDA (including cash expenses to reduce
workforce) was 3.2x, above our threshold of 3x for the company at the current
rating. We expect leverage to rise modestly by the end of 2012 and then drop
to close to 3x by year-end 2013. For the 12 months ended Sept. 30, 2012, pro
forma EBITDA coverage of interest expense was 4.6x, and conversion of EBITDA
to discretionary cash flow was 41%. We expect the conversion of EBITDA into
discretionary cash flow for 2012 and 2013 to remain healthy, at around 50%. We
expect FTI Consulting will continue to use its discretionary cash flow to fund
acquisitions and stock buybacks.
FTI Consulting is very acquisitive, having made numerous acquisitions since
2005. The company's goal is to increase its international revenue contribution
to about 30% of consolidated revenue in two years. International operations
are profitable, but their margins are typically lower than those in the U.S.
because of scale. As of Sept. 30, 2012, FTI Consulting operated in 24
countries, accounting for 26% of total revenues, compared with 10 countries in
2006. Despite its success in incorporating acquisitions into the business, the
company's aggressive acquisition strategy and integration risks remain
potential negative factors.
In June 2012, the company announced a $250 million share repurchase program to
be executed over the next two years. The company generates good discretionary
cash flow and has excess cash to finance both the buyback program and ongoing
operating needs. As of Sept. 30, 2012, the company had repurchased $20 million
of shares. We will continue to closely monitor the company's financial policy
with regard to its share buybacks and sizable acquisitions.
FTI has adequate liquidity to cover its needs over the near-to-intermediate
term, even in the event of moderate unforeseen EBITDA declines. Our assessment
of FTI Consulting's liquidity profile incorporates the following expectations,
assumptions, and factors:
-- We expect sources to cover uses for the upcoming 12 to 24 months by
1.2x or more.
-- We also expect cash sources will continue to exceed cash uses, even
with a 20% drop in EBITDA over the next 12 months.
-- The company has adequate covenant headroom for EBITDA to decline by
15% without breaching coverage tests.
-- Because of the company's high conversion of EBITDA to discretionary
cash flow, we believe it could absorb low-probability, high-impact shocks.
-- In our opinion, the company has a generally high standing in the
Pro forma for the refinancing transaction, liquidity sources include a cash
balance of about $127 million and substantial availability on the company's
$350 million revolving credit facility. We expect about $130 million of
discretionary cash flow in 2012 and $135 million in 2013. FTI Consulting's
next debt maturity is the $350 million revolving credit facility, which
matures in 2017.
The proposed credit agreement contains financial covenants, including a
maximum total and senior leverage ratio as well as a fixed charge coverage
ratio. The 4x total debt leverage covenant steps down to 3.75x on March 31,
2016, and the 3x senior debt leverage covenant steps down to 2.75x on March
31, 2016. The maximum total leverage ratio is the most restrictive covenant.
Based on our assumptions for 2012 through 2014, we expect the company to
maintain an adequate margin of compliance over the near-to-intermediate term.
While working capital usage can fluctuate with revenue growth, capital
expenditures as a percentage of EBITDA are typically low, at between 9% and
12%, and should not impede cash flow generation.
We are assigning a 'BB' issue level rating (one notch below our 'BB+'
corporate credit rating on FTI Consulting) to the proposed senior notes, with
a recovery rating of '5', indicating our expectation for modest (10% to 30%)
recovery for lenders in the event of a payment default.
The negative outlook reflects the possibility that we could lower our ratings
on FTI Consulting if it appears that the company's 2013 performance will not
meet our expectations, rendering year-end leverage above 3.0x-3.1x. We believe
this would most likely occur as a result of accelerated declines in the
technology segment, along with negative operating trends in the company's
other businesses, and debt-financed acquisitions, combined with major share
repurchases. We could also lower the rating if the EBITDA margin falls below
14%. We believe this could happen if the technology segment declines further
as a result of increased competition and if the corporate
finance/restructuring business experiences a steep decline in business.
We could revise the rating outlook to stable if FTI Consulting were able to
reduce and maintain debt leverage below 3x, while preserving adequate
Related Research And Criteria
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 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
FTI Consulting Inc.
Ratings Affirmed; CreditWatch/Outlook Action
Corporate Credit Rating BB+/Negative/-- BB+/Stable/--
FTI Consulting Inc.
$300 mil sr unsecd nts due 2022 BB
Recovery Rating 5