(The following statement was released by the rating agency) Overview
-- U.S. financial data provider SNL Financial LC is refinancing its existing credit facility and paying a $50 million dividend to shareholders.
-- We are affirming our 'B' corporate credit rating on SNL and revising the rating outlook to stable from positive.
-- We are assigning 'B' issue-level ratings to its $30 million first-lien revolving credit facility due 2016 and $260 million first-lien term loan due 2018, with recovery ratings of '3'.
-- The stable outlook reflects our view that despite positive operating trends, there is a risk of future debt-funded acquisitions or dividends.
Rating Action On Oct. 10, 2012 Standard & Poor's Ratings Services revised its rating outlook on Charlottesville, Va.-based SNL Financial LC to stable from positive and affirmed the 'B' corporate credit rating.
At the same time, we assigned 'B' issue-level ratings to the company's $290 million senior first-lien credit facilities (the same level as the corporate credit rating) with recovery ratings of '3', indicating our expectation of meaningful (50% to 70%) recovery for debtholders in the event of a payment default. The senior secured credit facilities consist of a $30 million revolver due 2017 and a $260 million term loan due 2018.
The outlook revision reflects our expectation that despite positive operating trends, the special dividend increases debt leverage higher than we previously anticipated. Our 'B' corporate credit rating on SNL reflects our view that the company will post low-double-digit revenue and EBITDA growth over the balance of 2012, and that growth momentum will continue in 2013, albeit with ongoing high leverage. Despite our expectation of EBITDA growth we expect deleveraging to be minimal over the intermediate term due to the private equity sponsor's demonstrated aggressive financial policy following the initial LBO in July 2011. In our assessment, SNL's business risk profile is "weak" under our criteria because of its narrow business position, relatively small size, and revenue exposure to volatile financial markets and the eurozone. We regard the financial risk profile as "highly leveraged" under our criteria based on the company's high pro forma lease-adjusted debt-to-EBITDA ratio in the mid-7x area as of June 30, 2012, EBITDA, and on the private-equity owner's financial policy, given the proposed transaction and a demonstrated acquisitive growth history.
SNL company compiles, analyzes, and publishes corporate, market, and financial information on companies in the banking, insurance, financial services, real estate, energy, and media and communications industries. SNL's heavy reliance on financial markets means that a decline in financial markets or any merger and acquisition activity could hurt revenues, particularly when contracts come up for renewal. We also see a significant risk that longer term, much larger and more well-established companies like Thomson Reuters or Bloomberg LLC could decide to compete directly with SNL for the same business. These risk factors are only partly offset by the company's high percentage of subscription-based revenue and a record of growth during the 2008-2009 economic downturn.
For the remainder of 2012, we have assumed revenue could grow at a low-double-digit percent rate and EBITDA at a slightly lower rate because of modest new client additions, continued high retention of existing clients, and price increases. In 2013, we expect a continuation of recent trends would likely lead to high single-digit-percentage growth in revenue and EBITDA. We expect the EBITDA margin to decline slightly from the current mid-20% area because of probable increases in marketing spending and product development associated with the company's growth strategy.
In the quarter ended June 30, 2012, revenue and EBITDA (before noncash stock compensation expense) grew at an 18% rate while EBITDA increased meaningfully due to costs associated with the company's launch in the Asian market and acquisitions completed over the past 12 months. Lease-adjusted debt to EBITDA pro forma for the transaction is in the mid-7x area. We expect adjusted leverage could decrease to the low-7x area in late 2012, based on likely EBITDA growth. In 2013, we expect leverage to decline to the mid-to-low 6x area due to EBTIDA growth. Adjusted leverage is in line with the indicative financial risk debt-to-EBITDA threshold of 5x or greater that characterizes a "highly leveraged" financial risk profile under our criteria. EBITDA coverage of interest expense was in the mid-2x area as of June 30, 2012. For the next 12 months, pro forma for a full year of interest expense under the new capital structure, we expect conversion of EBITDA to discretionary cash flow (DCF) to be in the 40% to 50% range, in line with current levels.
We believe SNL has "adequate" liquidity to cover its capital needs over the next 12 to 18 months. Expectations and assumptions that support our liquidity assessment are as follows:
-- We expect sources of liquidity over the next 12 to 24 months to cover uses by 1.2x or more.
-- Net sources would be positive, even with a 15% to 20% drop in EBITDA over the next 12 months, in our view.
-- SNL has sufficient covenant headroom for EBITDA to decline by about 15% to 20% without breaching coverage tests over the coming 12 months.
-- Based on the company's current cash balances and availability under its revolving credit facility, we believe it could absorb low-probability, high-impact shocks over the coming year.
Liquidity sources include pro forma cash balances of $7 million and full availability under the new $30 million revolving credit facility, and positive FFO between $20 million and $25 million, based on our expectations for the next 12 months. Uses of liquidity over the next 12 months include about $10 million of capital expenditures. Debt maturities consist of the undrawn revolving credit facility, maturing in 2017, and the term loan in 2018. As of June, 30, 2012, the company had a 23% margin of compliance with the first-lien covenant test. The new credit agreement will be covenant light.
The stable rating outlook reflects our view that SNL will have EBITDA growth as a result of positive operating performance and that debt leverage will fall below 7x by the end of 2013. We could lower the rating if adverse financial market or macroeconomic developments squeeze revenues, EBITDA, and discretionary cash flow generation. Given the recent history of acquisitions and dividends, we could also lower the rating if we are not convinced the company will reduce debt leverage below 7x by 2013. Although unlikely at this point we could consider an upgrade if positive operating performance continues along with a firm commitment from management to achieve and maintain leverage below 5.5x on a sustained basis.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Ratings Affirmed; Outlook Action
To From SNL Financial LC
Corporate Credit Rating B/Stable/-- B/Positive/--
New Ratings SNL Financial LC
$30M revolver due 2017 B
Recovery Rating 3
$260M term loan due 2018 B
Recovery Rating 3
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)