Overview
— We are revising our outlook on New York-based
information solutions provider Thomson Reuters Corp. to negative
from stable due to the weaker-than-expected operating
performance of the company’s Financial & Risk (F&R;) segment.
— We are also affirming all our ratings on the company,
including our ‘A-‘ long-term corporate credit rating.
— The negative outlook reflects Standard & Poor’s view of
the weaker-than-expected operating performance within the F&R;
segment and hurdles Thomson Reuters faces in returning this
business to healthy and sustainable revenue growth given the
slow economic recovery and intensely competitive operating
conditions.
Rating Action
On May 23, 2012, Standard & Poor’s Ratings Services revised
its outlook on New York-based information solutions provider
Thomson Reuters Corp. to negative from stable. At the same time,
Standard & Poor’s affirmed its ratings on the company, including
its ‘A-‘ long-term corporate credit rating.
We base the outlook revision on our view of the
weaker-than-expected operating performance in the company’s
Financial & Risk (F&R;) segment, which we expect will continue
this year. Results for the first quarter ended March 31, 2012,
show a 1% decline in F&R;’s organic revenue, compared with the
same quarter last year, as well as a reported EBITDA margin of
25.3%, down from 25.8% in the quarter ended March 31, 2011.
Thomson Reuters’ US$3 billion goodwill impairment charge in
fourth-quarter 2011 reflected the setbacks experienced by this
segment.
Rationale
The ratings on Thomson Reuters reflect Standard & Poor’s
assessment of the company’s “strong” business risk profile and
“intermediate” financial risk profile (based on our criteria).
Our business risk assessment is based on Thomson Reuters’
competitive position in the global business-to-business
information markets, strong EBITDA margin, and geographic
diversity. Our financial risk assessment reflects the company’s
investment-grade credit protection measures and substantial free
cash flow generation, partially offset by the sizable annual
dividend.
The company is a major global integrated information
solutions provider, operating under four segments (the pro forma
results exclude Thomson Reuters’ healthcare business and other
expected divestitures this year, as well as corporate and
other):
— F&R–58;% of pro forma revenue and 51% of reported EBITDA
for the first
quarter ended March 31, 2012;
— Legal–25% of revenue and 30% of EBITDA;
— Tax & Accounting–10% of revenue and 11% of EBITDA; and
— Intellectual Property & Science–7% of revenue and 8% of
EBITDA.
The financial industry has undergone a dramatic change in
market dynamics given the downturn in the global financial
markets in the last recession, with Standard & Poor’s believing
that financial institutions will continue to downsize. The
effect at Thomson Reuters, through its F&R; segment, was more
modest during the recession owing to the company’s high percent
of recurring subscription revenues and business diversification,
and the fact that the largest customer accounts for only about
1% of total consolidated revenue. However, the F&R; business has
yet to return to healthy organic revenue growth as we had
expected. The segment’s revenue was up only 0.4% in the three
months ended March 31, due to a 2.0% contribution from
acquisitions, offset by a 1.0% decline in organic revenue and
unfavorable foreign exchange effects. The decline in F&R;’s
organic revenue was driven by desktop losses and lower
investment management revenue due to business execution issues
and difficult financial sector conditions in Europe. We believe
it will take some time for management to position this business
for sustainable growth, which we expect will be driven by
contributions from the new financialinformation platform,
Thomson Reuters Eikon, as well as the Thomson Reuters Elektron
network and other products.
Total revenue from ongoing businesses was up 3.6% in the
quarter ended March 31, 2012, compared with the three months
ended March 31, 2011, due to increases in each segment. Higher
revenue was mostly driven by acquisitions, with some organic
growth contributing as well. The reported adjusted EBITDA margin
improved to 25.9% in the first quarter 2012, from 23.3% in the
same period in 2011, due to higher revenue, savings from
efficiency and integration initiatives, and the elimination of
integration expenses.
Our base-case scenario for 2012 includes flat-to-low,
single-digit percent revenue growth from ongoing businesses. Key
assumptions in our scenario include flat-to-slightly-lower
revenue in the F&R; segment, low single-digit percent growth in
the Legal segment, with higher growth in the two remaining
segments. In addition, we expect expenses will decline as a
percent of revenue, leading to improvement in the EBITDA margin
this year. Furthermore, we believe the company will continue to
generate strong cash flows this year, which will support the
high dividend payout ratio.
Credit ratios (adjusted for operating leases, pensions, and
preferred shares [50% of which is treated as debt]) were fairly
stable in the past few quarters, with debt to EBITDA of about
2.4x for the 12 months ended March 31. We believe that Thomson
Reuters’ credit measures will remain largely unchanged this
year, with adjusted debt to EBITDA likely to be less than 2.5x.
While the company will likely continue to make sizable
acquisitions as well as share repurchases this year, we expect
these activities to be financed out of divestiture proceeds and
discretionary cash flow.
Liquidity
Thomson Reuters has strong liquidity in Standard & Poor’s
view, with significant cash balances, good availability under
its US$2 billion revolving credit facility due 2016, and
substantial free cash flow. Annual capital expenditures, which
should be about 7%-8% of revenue, are funded by operating cash
flow, leaving what we see as significant available cash flow for
the company’s sizable dividends.
In accordance with our criteria, relevant aspects of Thomson
Reuters’ liquidity are as follows:
— We see liquidity sources over uses to be in excess of
1.5x for the next two years; we expect net sources would be
positive even with a 30% drop in EBITDA.
— Due to what we view as Thomson Reuters’ high cash
balances and good discretionary cash flow generation, we believe
it could absorb high-impact, low-probability adverse business
developments.
— In our opinion, the company has a wide margin of
compliance with its 4.5x debt leverage covenant, which could
withstand an EBITDA decline of more than 30%, without the
company breaching the covenant.
— We expect Thomson Reuters will continue to have a
generally high standing in the capital markets.
— The company displays very prudent financial risk
management, in our view.
Outlook
The negative outlook reflects Standard & Poor’s view of the
weaker-than-expected operating performance within the F&R;
segment and hurdles Thomson Reuters faces in returning this
business to healthy and sustainable revenue growth given the
slow economic recovery and intensely competitive operating
conditions. A downgrade could result from further execution
issues in the F&R; segment; weak revenue growth trends for the
company as a whole or specifically in F&R; or adjusted debt to
EBITDA at or above 2.5x on a consistent basis. Alternatively, we
could revise the outlook to stable if Thomson Reuters
demonstrates sustainable improvement in F&R;’s operating
performance, as well as its other business segments, while
maintaining adjusted debt to EBITDA below 2.5x.
Related Criteria And Research
— Methodology and Assumptions: Liquidity Descriptors For
Global Corporate Issuers, Sept. 28, 2011
— Criteria Methodology: Business Risk/Financial Risk
Matrix Expanded, May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April
15, 2008
Ratings List
Thomson Reuters Corp.
Outlook Revised To Negative
To From
Corporate credit rating A-/Negative/– A-/Stable/–
Ratings Affirmed
Senior unsecured debt A-
Preferred stock
Global scale BBB
Canada scale P-2
Commercial paper A-1(LOW)
