NEW YORK - (Business Wire) Fitch Ratings has placed the following ratings for Broadridge Financial Solutions, Inc. (Broadridge) on Rating Watch Positive: --Issuer Default Rating (IDR) 'BBB';
--Senior unsecured revolving credit facility 'BBB';
--Senior unsecured debt 'BBB'.
The Rating Watch Positive placement reflects Fitch's belief that Broadridge's credit profile will improve as a result of the announced divestiture of the clearing client contracts at its securities clearing subsidiary Ridge Clearing & Outsourcing Solutions, Inc. (Ridge), for approximately $60-$70 million. The 'BBB' rating incorporates Fitch's view of the current heightened balance sheet risk posed by Ridge's operations which includes the settlement of illiquid assets. Upon closing of this transaction, Fitch expects that Broadridge's IDR will likely be upgraded by one notch, reflecting the removal of this balance sheet risk, as well as reduced volatility in the quarterly free cash flow profile, which has heretofore been driven by working capital requirements at Ridge.
The rating action also considers Broadridge's reduced leverage over the past year from the repurchase of approximately $125 million of its notes outstanding. Fitch estimates Broadridge's current leverage (total debt / operating EBITDA) at 0.8 times (x) or 1.3 when adjusted for operating leases, versus 1.0x and 1.5x adjusted at June 30, 2008, with interest coverage in excess of 30x. Fitch does not expect this transaction to materially impact credit protection metrics.
Broadridge announced a definitive agreement to the clearing contracts of Ridge to Penson Financial Services, Inc., a subsidiary of Penson Worldwide Inc. (Penson). Broadridge will receive approximately $60-$70 million in compensation from the sale in the form of $20-$25 million of Penson equity and a subordinated note from Penson. Additionally, the sale of Ridge will free up $180-$200 million of regulatory capital held at the subsidiary. Fitch believes that Broadridge will likely use this capital to repurchase shares over time. Broadridge has also agreed to provide Penson with an 18-month, $50 million subordinated loan to fund additional regulatory capital to support the Ridge business in the event that Penson has not otherwise raised the capital by the closing of the transaction. The transaction is expected to close within the next six months.
In conjunction with the sale agreement, Broadridge has entered into a service agreement with Penson to provide outsourced securities processing for the customers of Ridge that Penson would inherit. Penson will also transition the processing of its existing customer base to Broadridge over the next 12-18 months. It is expected that the revenue potential of this customer contract will be equal to the net revenue Broadridge generated from Ridge's operations.
The ratings are supported by the following considerations:
--Broadridge's leading share in the proxy distribution market which Fitch views as having minimal competitive threats and pricing that is largely insulated by SEC regulations.
--The company's Investor Communications and Securities Processing business segments produce steady free cash flow with minimal exposure to economic volatility
--Long-term customer contracts and customer relationships in both core businesses.
--Broadridge has a diverse customer base with no customer representing greater than 7% of total revenue and expectations of achieving greater geographic diversification by capitalizing on growth opportunities in international markets going forward.
--The low capital intensity of Broadridge's business model has produced high historical returns on invested capital.
Ratings concerns include the following:
--Changing regulations could negatively impact Broadridge's business, particularly related to the proxy distribution business.
--Broadridge is facing increasing competition in its securities processing business as well as the nascent outsourcing business.
--Execution risk related to the company's processing of confidential client information and the risk of security breaches as well as operating risks stemming from the mission critical nature of the company's securities processing solutions.
--Broadridge is exposed to counterparty risk in its clearing business through its broker dealer subsidiary, Ridge Clearing, although the company maintains strict standards in limiting this risk as it is not core to the overall business model. This concern will be eliminated with the aforementioned divestiture.
Liquidity as of Sept. 30, 2009 was solid at $732 million which includes $232 million in cash, a portion of which was located at Ridge, and a fully available $500 million unsecured revolving credit facility which matures in March 2012. Fitch expects annual free cash flow to average at least $200 million. Additionally, Ridge Clearing has access to $850 million in uncommitted credit lines which includes various unsecured uncommitted credit facilities totaling $350 million as well as a $500 million uncommitted secured securities lending facility, both of which were undrawn at Sept. 30. Broadridge provides a guarantee and has access to a majority portion of the uncommitted unsecured credit facilities. Ridge Clearing is the sole obligator of the securities lending facility and a minority portion of the uncommitted credit facilities.
Total debt as of Sept. 30, 2009 was $324 million which includes $200 million outstanding under a senior unsecured term loan facility which matures March 2012 and $124 million in senior unsecured notes due June 2017.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings, New York
Jason Paraschac, +1-212-908-0746
Melissa Link-Cohen, +1-212-908-0611
Nick P. Nilarp, CFA, +1-212-908-0649
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