Overview
— U.S. investment decision support tools provider MSCI is
reducing its debt by approximately $200 million through
refinancing. — We are raising our corporate credit rating on
MSCI to ‘BB+’ from ‘BB’.
— In addition, we are raising the issue-level rating on the
amended senior secured credit facilities to ‘BBB’ from ‘BB+’ and
revising the recovery rating to ‘1’ from ‘2’.
— The stable outlook reflects MSCI’s consistent operating
performance through economic cycles and our expectation that its
financial policy will be consistent with the intermediate
financial risk profile.
Rating Action
On April 19, 2012, Standard & Poor’s Ratings Services raised
its corporate credit rating on New York City-based MSCI Inc. to
‘BB+’ from ‘BB’. The rating outlook is stable.
We also raised the issue-level rating on the company’s
senior secured credit facilities, consisting of a $1.125 billion
term loan B to ‘BBB’ from ‘BB+’. At the same time, we revised
the recovery rating on this debt to ‘1’ from ‘2’. We assigned a
‘BBB’ rating with a ‘1’ recovery rating to the $600 million term
loan A and the $100 million revolver. The ‘1’ recovery rating
indicates our expectation of very high (90%-100%) recovery for
lenders in the event of a payment default.
Rationale
The ratings reflect MSCI’s “fair” business and
“intermediate” financial risk profiles. We expect solid revenue
growth and good cash flow generation in fiscal 2012, resulting
in an improving financial profile and leverage (adjusted for
operating leases) near the 2x range.
MSCI is a provider of investment decision support tools,
including indices, portfolio risk and performance analytics, and
corporate governance products and services. Major products
include global equity indices marketed under the MSCI brand and
risk and portfolio management analytics marketed under the
RiskMetrics and Barra brands. The acquisition of RiskMetrics in
2010 added risk management and governance capabilities and
somewhat diversified the company’s product portfolio. MSCI’s
asset-based fee (ABF) revenues–part of the index segment–are
based on the clients’ assets under management (AUM) linked to
MSCI indices and are growing rapidly from a small base.
We consider MSCI’s business risk profile fair, reflecting a
narrow product focus, with revenues mostly tied to the health of
the investment management industry, as well as potential
competitive threats from other financial index providers with
greater brand recognition. MSCI’s position as one of the market
leaders in its respective product lines, with strong brand
recognition and a global footprint, partially offsets those
factors. In addition, the company’s mostly subscription-based
revenues are recurring, with client retention rates near 90%,
helping it temper the effects of the financial industry downturn
in 2008-2009. The revenue base is relatively diverse, with the
top 10 customers accounting for about 25% of revenues and about
half of revenues coming from outside the Americas. We believe
that secular investment trends, including globalization of
investing, the popularity of passive investments, and growing
demand for risk measurement position the company for further
growth in the intermediate term.
Organic revenue growth was about 10% in 2011, led by strong
growth in index products and risk management analytics. Based on
growth trends entering 2012 and the highly recurring
subscription revenue base, we expect mid- to high-single-digit
revenue increases in fiscal 2012, led by continuing demand for
index products. We expect MSCI’s adjusted EBITDA margin to
stabilize in the current high-40% range as the company balances
its scalable cost structure against product investment needs.
Standard & Poor’s views MSCI as having an intermediate
financial risk profile. Its recurring, subscription-based
revenue model and modest capital requirements generate
consistent cash flow. We anticipate this trend continuing
through fiscal 2012, with free operating cash flow (FOCF) in
excess of $200 million. Pro forma leverage, adjusted for the
proposed $200 million debt repayment and capitalized operating
leases, is about 2.3x as of fiscal year-end 2011 versus a peak
of about 4.0x following the RiskMetrics acquisition in 2010, and
reflects MSCI’s commitment to a more conservative financial
profile. We further expect leverage to decline modestly in
fiscal 2012, mostly through EBITDA growth.
Liquidity
MSCI has “adequate” liquidity. Sources of liquidity include
pro forma cash and investments of about $200 million, of which
about one-third is held overseas and partly subject to
repatriation taxes; an undrawn revolving credit facility of $100
million; and FOCF which we anticipate will exceed $200 million
in fiscal 2012. Uses of cash are modest, with low mandatory debt
amortization of $11 million per year, minimal working capital
needs, and capital expenditures likely to peak in the $50
million range in fiscal 2012.
Our assessment of MSCI’s liquidity profile also incorporates
the following expectations, assumptions, and factors:
— We expect sources of liquidity to exceed uses by 1.2x or
more over the next 12 to 24 months.
— We expect net sources would be positive in the near term,
even with a 15% decline in estimated EBITDA in the next 12
months. — We anticipate the company will make modest
acquisitions during the next 12 to 24 months.
— MSCI is likely able to absorb revenue and margin
pressures arising from an industry downturn with minimal need
for refinancing.
— MSCI has adequate headroom under its covenants.
— There are no significant debt maturities in the near
term.
Recovery analysis
For the complete recovery analysis, see the recovery report
on MSCI, to be published separately on RatingsDirect.
Outlook
The stable rating outlook reflects MSCI’s steady operating
performance through economic cycles and our expectation that its
financial policy will be consistent with the intermediate
financial risk profile. An upgrade is unlikely over the next
year given our assessment of the business risk and current
financial profile. A downgrade would be the result of a more
aggressive financial policy, such as a large debt-financed
acquisition, resulting in sustained leverage above the mid-3x
level.
