Aug 08 - The ratings of Verisk Analytics, Inc (Verisk) and Insurance Services Office, Inc (ISO), a wholly owned subsidiary of Verisk, remain unchanged after Verisk’s announcement to acquire Argus Information and Advisory Services, LLC (Argus), according to Fitch Ratings.
Argus will be acquired through the purchase of 100% of the equity of its parent AIAS holding Company, LLC. The transaction is valued at $425 million and is expected to close by the end of the month. Argus will be part of the Decision Analytics segment, along with Verisk’s Mortgage and Financial Services suite of data and products. The acquisition is consistent with Verisk’s strategic plan to grow the company’s data and products offerings organically and through acquisitions.
Verisk plans to fund the acquisition using a combination of borrowings under its credit facility ($400 million) and cash ($25 million). Including the additional debt only (and none of Argus’s EBITDA), Fitch calculates June 30, 2012 pro forma unadjusted gross leverage of 2.5 times (x). While this exceeds the ratings and Verisk’s 2.0x leverage target, Fitch expects leverage to decline and return to targeted levels within 15 to 18 months through absolute debt reduction and EBITDA growth. The ratings can tolerate leverage in excess of targeted levels for an acquisition, with the expectation that leverage would be reduced within a 12-to-18-month timeframe. Fitch expects the rate of share repurchases to slow in order to dedicate FCF towards the reduction of absolute levels of debt.
As of June 30, 2012, the company had solid liquidity consisting of $97 million in cash, and $585 in availability under its $725 million revolving credit facility due 2016 (the availability includes the $10 million repayment made on July 2nd). Fitch calculates $308 million in free cash flow (FCF) for the last twelve months ending June 2012. Fitch’s conservative base case expects the company to generate $200 million to $300 million in FCF in 2012, which includes pension contributions of approximately $80 million. Fitch believes pro forma liquidity of $72 million in cash and $185 million in revolver availability is adequate.
Fitch expects the company to have sufficient liquidity to handle all of its maturities. Verisk and ISO’s maturity schedule consists of approximately:
--$180 million due in 2013;
--$170 million due in 2015;
--$50 million in private placement notes in 2016;
--The $725 million credit facility in 2016 (pro forma for the acquisition of $540 million in borrowings);
--$250 million in 2019;
--$450 million in 2021.
As of June 30, 2012, Fitch calculates gross unadjusted leverage at 1.9x and interest coverage of 10x.
The ratings reflect Verisk’s dominant market position within its Property and Casualty (P&C) insurance related businesses. Any competition for its industry-standard programs and specific property information primarily comes from internal P&C insurance company departments.
The company has delivered consistent organic revenue growth, despite economic conditions. Verisk’s core products are largely a non-discretionary purchase for most if not all of its clients. Fitch believes that the company has the ability to organically grow revenues in the low single digits during an economic downturn.
While not highly likely, potential disruptions to Verisk’s future access to its core insurance related data and the potential for increased data cost is a concern for Fitch. This risk is mitigated by the rationale points discussed above and by the company’s track record and long relationship with insurance companies and regulators. This relationship dates back to 1971 and is extended further back when including its history with the insurance bureaus.
The company has diversified its customer group, reducing its exposure to P&C customers to around 52% in 2011 (in 2003 it was 82%). The diversification was primarily driven by growth in new business lines that leveraged the company database and analytical know-how.
The company continues to grow its non-P&C businesses organically and through acquisitions. Fitch recognizes that by growing its other businesses, EBITDA margins may decline over time. However, Verisk’s margin is high relative to its peers and Fitch expects margins to remain in the mid-40% range. Fitch calculates Verisk’s EBITDA margin at 46.5% as of June 30, 2012.
Verisk’s credit profile and ratings are consistent relative to Fitch’s ratings on other Professional Publishers (Thomson Reuters; Dun & Bradstreet; McGraw-Hill; and Reed Elsevier).
The ratings could be upgraded if the company were to target a more conservative unadjusted leverage metric with a rationale for such a target.
Ratings may be pressured if the company’s performance does not materially meet Fitch’s expectations and leverage is unable to return to 2x target level within 18 months. While not expected, material share buyback activity or additional debt funded acquisitions that delayed the company’s planned reduction in leverage may also pressure the ratings.
Fitch rates Verisk as follows:
--Long-term IDR ‘A-';
--Short-term IDR ‘F2’;
--Senior unsecured notes ‘A-'.
--Long-term IDR ‘A-';
--Short-term IDR ‘F2’;
--Revolving credit facility ‘A-';
--Unsecured private placement notes ‘A-'.