(The following statement was released by the rating agency)
Overview
— BATS Global Markets Inc. is seeking to issue $350 million
senior secured credit facilities, consisting of a $300 million, six-year
first-lien term loan and a $50 million, three-year revolver, undrawn at close.
— The company will use proceeds from the issuances to fund an
approximate $300 million dividend to its shareholders.
— We are assigning a ‘BB-‘ corporate credit rating on BATS and a ‘BB-‘
issue rating on the company’s $350 million senior secured credit facilities.
— The stable outlook reflects our expectation that BATS will maintain
its market share and current operating performance.
Rating Action
On Nov. 27, 2012, Standard & Poor’s Ratings Services assigned its ‘BB-‘
corporate credit rating on BATS Global Markets Inc. The outlook is stable. At
the same time, we assigned our ‘BB-‘ issue rating on the company’s $350
million senior secured credit facilities.
Rationale
Standard & Poor’s ratings on BATS reflect the company’s status as the
third-largest stock exchange in the U.S. and the largest pan-European equities
trading venue. The company has a well-diversified customer base, with no
single customer contributing more than 8% of trading volume. BATS’ scalable
technology platform, which we view as a positive ratings factor, has enabled
it to rapidly grow its market share by pursuing an aggressive pricing
strategy. However, several negative factors counteract these strengths. BATS
still depends on U.S. cash equity trading volume, even though it has been
expanding into new geographies and asset classes. Following a planned dividend
payment, the company will have negative tangible equity and high debt
leverage. Additionally, we believe that BATS is highly vulnerable to
operational risk.
BATS develops and operates electronic markets for the trading of listed cash
equity securities in the U.S. and Europe and listed equity options in the U.S.
With average trading volumes (ADV) in U.S. equities of 815 million shares and
average daily notional value (ADNV) in European equities of EUR6.8 billion, BATS
had a 12.5% market share in U.S. equities and a 23.7% market share in European
equities as of the third quarter ended Sept. 30, 2012.
BATS’ main sources of revenue are transaction fees, market data fees, and port
fees. Although the company has been diversifying its revenue sources, it is
still heavily dependent on the U.S. equity markets’ trading volumes. For the
nine months ended Sept. 30, BATS reported $171 million of total revenue, 78%
of which came from U.S. equities. European equities and U.S. options
contributed 15% and 7%, respectively. The company’s transaction fee
contribution, which was 62% year-to-date 2012, is considerably higher than
that of peers’.
BATS’ pretax operating margin was 26.5% in the nine months ended Sept. 30, up
significantly from 18.8% for full-year 2011. The EBITDA margin also increased,
to 36.5% from 25.6%, over the same period. Profitability was up mainly because
of an increase in net capture and the Chi-X Europe merger, from which BATS
extracted significant cost savings. Despite these improvements, profitability
metrics still compare unfavorably with those of most exchanges that we rate.
We view BATS’ liquidity and funding as adequate. As of Sept. 30, 2012, the
company had $49.6 million of cash and cash equivalents and $81.1 million in
financial instruments consisting of highly liquid U.S. Treasury securities.
Adjusted for a $65 million contingent liability related to the Chi-X
acquisition due in fourth-quarter 2012 and $10 million in transaction
financing-related expenses, BATS’ available liquidity would be $55.7 million,
covering almost seven months of operating expenses. The $50 million revolver
that the company is planning to add will further improve its liquidity
profile.
As of Sept. 30, 2012, BATS had no outstanding debt. The company is planning to
issue $350 million senior secured credit facilities, consisting of a $300
million, six-year first-lien term loan and a $50 million, three-year revolver,
undrawn at close. The company will use proceeds to fund a $300 million
dividend to BATS shareholders and for general corporate purposes. The borrower
is BATS Global Markets Inc., and its direct and indirect subsidiaries will
guarantee the loan. Adjusted for the new debt issuance, pro forma debt
leverage (based on annualized year-to-date EBITDA) and EBITDA interest
coverage would be 3.6x and 4.4x, respectively, as of Sept. 30. Both of these
metrics compare unfavorably with those of other exchanges we rate.
BATS had $130 million in tangible equity as of Sept. 30, 2012. Adjusted for
the dividend transaction, pro forma tangible equity would be negative $177
million. Although our credit analysis for exchanges focuses more on cash flow
than balance sheet leverage, we expect regulated entities to maintain
sufficient tangible equity to cover unexpected losses.
BATS, like other exchanges, is highly exposed to operational risk. This became
evident in spring 2012, when it suffered the worst technical glitch in its
seven-year history that prevented it from taking its own shares public on its
own exchange. As the software glitch disrupted trading within seconds of its
debut, BATS decided to withdraw its IPO. The IPO failure hurt BATS’
reputation, but the overall damage to the company was relatively limited. BATS
continued to increase its market share, and it’s not facing any pending
litigation related to the IPO. Unlike Facebook’s IPO fiasco on the NASDAQ,
neither BATS’ members nor investors suffered losses.
Outlook
The stable outlook reflects our expectation that BATS will be able to maintain
its market share and current operating performance. If BATS can reduce its
debt, bringing debt leverage to less than 3.0x, and maintain or grow its
market share while introducing a new pricing structure that could improve its
profitability, we would consider upgrading the company. On the other hand, if
BATS’ profitability and key credit metrics deteriorate following the debt
issuance, we could lower the rating. We could also consider downgrading the
company if it encounters another operational problem or decides to pay another
large dividend.
Related Criteria And Research
Standard & Poor’s Updated Methodology For Rating Exchanges And Clearinghouses,
July 10, 2006
Ratings List
New Rating; Outlook Action
BATS Global Markets Inc.
Issuer Credit Rating BB-/Stable/–
New Ratings
BATS Global Markets Inc.
$300 million Senior Secured First Lien due 2018 BB-
$50 million Senior Secured Revolver due 2015 BB-
(Caryn Trokie, New York Ratings Unit)
