(The following statement was released by the rating agency)Overview
-- U.S. financial data provider SNL Financial LC is refinancing itsexisting credit facility and paying a $50 million dividend to shareholders.
-- We are affirming our 'B' corporate credit rating on SNL and revisingthe rating outlook to stable from positive.
-- We are assigning 'B' issue-level ratings to its $30 million first-lienrevolving credit facility due 2016 and $260 million first-lien term loan due2018, with recovery ratings of '3'.
-- The stable outlook reflects our view that despite positive operatingtrends, there is a risk of future debt-funded acquisitions or dividends.
Rating ActionOn Oct. 10, 2012 Standard & Poor's Ratings Services revised its rating outlookon Charlottesville, Va.-based SNL Financial LC to stable from positive andaffirmed the 'B' corporate credit rating.
At the same time, we assigned 'B' issue-level ratings to the company's $290million senior first-lien credit facilities (the same level as the corporatecredit rating) with recovery ratings of '3', indicating our expectation ofmeaningful (50% to 70%) recovery for debtholders in the event of a paymentdefault. The senior secured credit facilities consist of a $30 millionrevolver due 2017 and a $260 million term loan due 2018.
Rationale
The outlook revision reflects our expectation that despite positive operatingtrends, the special dividend increases debt leverage higher than we previouslyanticipated. Our 'B' corporate credit rating on SNL reflects our view that thecompany will post low-double-digit revenue and EBITDA growth over the balanceof 2012, and that growth momentum will continue in 2013, albeit with ongoinghigh leverage. Despite our expectation of EBITDA growth we expect deleveragingto be minimal over the intermediate term due to the private equity sponsor'sdemonstrated aggressive financial policy following the initial LBO in July2011. In our assessment, SNL's business risk profile is "weak" under ourcriteria because of its narrow business position, relatively small size, andrevenue exposure to volatile financial markets and the eurozone. We regard thefinancial risk profile as "highly leveraged" under our criteria based on thecompany's high pro forma lease-adjusted debt-to-EBITDA ratio in the mid-7xarea as of June 30, 2012, EBITDA, and on the private-equity owner's financialpolicy, given the proposed transaction and a demonstrated acquisitive growthhistory.
SNL company compiles, analyzes, and publishes corporate, market, and financialinformation on companies in the banking, insurance, financial services, realestate, energy, and media and communications industries. SNL's heavy relianceon financial markets means that a decline in financial markets or any mergerand acquisition activity could hurt revenues, particularly when contracts comeup for renewal. We also see a significant risk that longer term, much largerand more well-established companies like Thomson Reuters or Bloomberg LLCcould decide to compete directly with SNL for the same business. These riskfactors are only partly offset by the company's high percentage ofsubscription-based revenue and a record of growth during the 2008-2009economic downturn.
For the remainder of 2012, we have assumed revenue could grow at alow-double-digit percent rate and EBITDA at a slightly lower rate because ofmodest new client additions, continued high retention of existing clients, andprice increases. In 2013, we expect a continuation of recent trends wouldlikely lead to high single-digit-percentage growth in revenue and EBITDA. Weexpect the EBITDA margin to decline slightly from the current mid-20% areabecause of probable increases in marketing spending and product developmentassociated with the company's growth strategy.
In the quarter ended June 30, 2012, revenue and EBITDA (before noncash stockcompensation expense) grew at an 18% rate while EBITDA increased meaningfullydue to costs associated with the company's launch in the Asian market andacquisitions completed over the past 12 months. Lease-adjusted debt to EBITDApro forma for the transaction is in the mid-7x area. We expect adjustedleverage could decrease to the low-7x area in late 2012, based on likelyEBITDA growth. In 2013, we expect leverage to decline to the mid-to-low 6xarea due to EBTIDA growth. Adjusted leverage is in line with the indicativefinancial risk debt-to-EBITDA threshold of 5x or greater that characterizes a"highly leveraged" financial risk profile under our criteria. EBITDA coverageof interest expense was in the mid-2x area as of June 30, 2012. For the next12 months, pro forma for a full year of interest expense under the new capitalstructure, we expect conversion of EBITDA to discretionary cash flow (DCF) tobe in the 40% to 50% range, in line with current levels.
Liquidity
We believe SNL has "adequate" liquidity to cover its capital needs over thenext 12 to 18 months. Expectations and assumptions that support our liquidityassessment are as follows:
-- We expect sources of liquidity over the next 12 to 24 months to coveruses by 1.2x or more.
-- Net sources would be positive, even with a 15% to 20% drop in EBITDAover the next 12 months, in our view.
-- SNL has sufficient covenant headroom for EBITDA to decline by about15% to 20% without breaching coverage tests over the coming 12 months.
-- Based on the company's current cash balances and availability underits 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 fullavailability under the new $30 million revolving credit facility, and positiveFFO between $20 million and $25 million, based on our expectations for thenext 12 months. Uses of liquidity over the next 12 months include about $10million of capital expenditures. Debt maturities consist of the undrawnrevolving credit facility, maturing in 2017, and the term loan in 2018. As ofJune, 30, 2012, the company had a 23% margin of compliance with the first-liencovenant test. The new credit agreement will be covenant light.
Outlook
The stable rating outlook reflects our view that SNL will have EBITDA growthas a result of positive operating performance and that debt leverage will fallbelow 7x by the end of 2013. We could lower the rating if adverse financialmarket or macroeconomic developments squeeze revenues, EBITDA, anddiscretionary cash flow generation. Given the recent history of acquisitionsand dividends, we could also lower the rating if we are not convinced thecompany will reduce debt leverage below 7x by 2013. Although unlikely at thispoint we could consider an upgrade if positive operating performancecontinues along with a firm commitment from management to achieve and maintainleverage 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 List
Ratings Affirmed; Outlook Action
To FromSNL Financial LC
Corporate Credit Rating B/Stable/-- B/Positive/--
New RatingsSNL 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 onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)
((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))