-- The global market for money transfer is becoming increasingly
competitive, forcing Western Union Co. to cut prices to retain or grow
its current market share.
-- At the same time, the company announced a 25% increase in dividends
and board authorization for $550 million of additional share repurchases.
Given our expectation for lower earnings over the coming year, we view this
decision as a sign that management is becoming increasingly aggressive with
its liquidity position in order to enhance shareholder value.
-- As a result, we are lowering the long-term issuer credit rating on
Western Union Co. to 'BBB+' from 'A-'.
-- We also revised our ratings outlook to negative from stable. Western
Union's price-cutting strategy could lead to sustained lower earnings. Unless
the company can return to the stronger earnings and cash flows it produced in
the past few years and fund and its shareholder initiatives without increasing
its financial leverage or depleting cash, we could lower the rating.
On Nov. 9, 2012, Standard & Poor's Ratings Services lowered its long-term
issuer credit Englewood, Colo.-based Western Union Co. (WU) to 'BBB+' from
'A-'. At the same time, we revised the outlook to negative from stable.
The downgrade is based on the increasingly competitive market for money
transfer, price cutting that we expect to limit earnings over the next year,
compliance changes that have affected the U.S. to Mexico and other Latin
American money-transfer corridors, and management's decision to increase
dividends and share repurchases despite the more challenging conditions.
The global money transfer business has recently become more competitive,
resulting in market-share challenges in several money-transfer corridors for
WU. The company also faces competition from electronic channels--including
digital and account-based money transfers--in which WU is a smaller
participant but growing quickly. WU's business has also slowed as a result of
compliance changes affecting the U.S. to Mexico and other Latin American
money-transfer corridors. The company has ended its agreement with more than
7,000 agents (40% of its total agents in Mexico) that were not meeting new
compliance requirements. In light of this slowdown for WU's money-transfer
business, the company announced a new strategy that includes cutting prices
and cost-savings initiatives. We factored into our assumptions a low
double-digit decline in EBITDA and expect debt to adjusted EBITDA to rise to
mid-to-high 2x over the next two years.
Management's focus on building shareholder value is moderately aggressive, in
our view, especially in light of these new developments. Since 2009, WU has
repurchased approximately $2.2 billion in shares. Including the recently
announced $550 million share repurchases authorization, WU can repurchase up
to $750 million through 2013. The quarterly dividend per share gradually
increased over the past couple of years, and, under the new shareholder plan,
the quarterly dividend has again increased by 25% to $0.125. WU has maintained
a stable financial profile while actively repurchasing shares since becoming a
public company; however, the continuation of repurchases despite negative
developments supports our view that the firm is taking an increasingly
aggressive financial posture.
Our ratings on WU are based on the strength of the company's premier money
transfer franchise--still by far the market leader--its history and proven
ability to generate strong and consistent cash flow and earnings, and its
relatively low exposure to credit, interest rate, and liquidity risks.
The outlook is negative. New competition and compliance changes create
uncertainty over the next two years in terms of WU's market share,
profitability, and cash flow. Specifically, WU's price-cutting strategy could
lead to lower earnings for a sustained period. We could lower the ratings if
WU loses market share, or cannot regain the stronger earnings and cash flows
it has produced the past few years, following the declines we expect in 2013.
The current rating also depends on WU's ability to fund its shareholder
initiatives with cash flows. We expect debt to adjusted EBITDA will rise to
mid-to-high 2x. We could lower the rating if debt to adjusted EBITDA exceeds
2.75x on a sustained basis. We could revise the outlook to stable if the
company's pricing cuts result in an improved competitive position and the
company maintains debt to adjusted EBITDA below 2.5x on a sustained basis.
Related Criteria And Research
Rating Finance Companies, March 18, 2004
Downgraded; Ratings Affirmed
Western Union Co. (The)
Issuer Credit Rating BBB+/Negative/A-2 A-/Stable/A-2
Senior Unsecured BBB+ A-
Western Union Co. (The)
Commercial Paper A-2