DBRS Confirms Thomson Reuters at BBB (high), R-2 (high), Pdf-3 (high), Stable Trends

DBRS has today confirmed Thomson Reuters Corporation’s (Thomson Reuters or the Company) BBB (high), R-2 (high) and Pfd-3 (high) ratings with Stable trends. The ratings continue to be supported by the Company’s entrenched market position across all its business lines, the diverse nature of its customer base and its strong free cash flow generating capacity. The ratings also reflect intensifying competition, the need for constant innovation, and the risks associated with the Company’s ongoing acquisitions and divestitures.

On October 29, 2013, DBRS downgraded the Company’s Issuer Rating, Unsecured Debentures and Unsecured Medium-Term Notes ratings to BBB (high) from A (low), Commercial Paper rating to R-2 (high) from R-1 (low) and Preferred Shares rating to Pfd-3 (high) from Pfd-2 (low). This action followed the Company’s change in financial management guidelines. As part of a broader plan to improve its business mix and cost structure while returning value to shareholders, the Company announced its intentions to target a net debt-to-EBITDA ratio of up to 2.5 times (x) vs. 2.0x prior. The downgrade reflected DBRS’s view that the target net debt-to-EBITDA ratio resulted in a credit risk profile that is no longer consistent with the A (low) rating category.

Thomson Reuters’ earnings profile is well placed in its revised rating category based on its entrenched market position and diversified revenue streams. In 2013, the Company continued to focus on product enhancements and acquisitions in growth segments, improvement in operating efficiencies and the divestiture of non-core assets. Revenues from ongoing businesses increased by 2% to $12.5 billion in 2013 on a constant currency basis as contributions from acquisitions exceeded organic declines in financial desktop subscription and core legal revenues.

Organic growth declined modestly within the Financial & Risk segment as banks have reduced head count and spending on information services over the past few years. Organic legal revenues also declined as a result of weakness in Latin America and the core legal research businesses. Excluding non-recurring items, Thomson Reuters’ consolidated margins remained relatively stable as cost-cutting and improvements within growth businesses mitigated the effects of revenue declines in mature business lines. Due to $275 million of non-recurring severance charges, EBITDA declined to $3.1 billion in 2013 from $3.3 billion in 2012.

Regarding the Company’s financial profile, cash flow from operations from ongoing businesses declined to $2 billion in 2013 from $2.8 billion in 2012 primarily due to a voluntary pension contribution of $500 million and approximately $150 million related to divestments. Operating cash flow was used to fund capex and dividends, which both increased modestly to just over $1 billion each. The Company made $1.2 billion of acquisitions and $400 million of share repurchases in 2013, financed largely through $1 billion of net debt issuance and close to $550 million from divestitures. As a result, gross debt-to-EBITDA increased to 2.60x (2.57x swap-adjusted) in 2013 from 2.11x (2.04x swap-adjusted) in 2012.

DBRS expects the earnings profile of Thomson Reuters to remain well positioned within the current rating category as the Company continues to execute its restructuring indicatives and acquire higher growth businesses. That said, DBRS expects revenues from ongoing businesses in 2014 to remain relatively flat at approximately $12.5 billion as growth across most business lines is expected to mitigate continued declines in the Financial & Risk segment. DBRS expects the trajectory of declines in Financial & Risk to continue to moderate as the economy rebounds and the Company continues to improve its product offerings. DBRS forecasts adjusted operating margins to rise from 24.5% (including severance charges) in 2013 to between 26% and 27% in 2014, due a decline in restructuring expenses year over year, further cost-cutting and a continued shift towards higher margin growth businesses. As such, DBRS expects EBITDA from ongoing businesses should rise to approximately $3.3 billion in 2014 (including $120 million of remaining severance charges). DBRS expects the Company to generate $400 million in annual cost savings by 2017 through product simplification, restructuring initiatives, and the achievement of scalable benefits.

Going forward, DBRS believes Thomson Reuters’ financial profile will remain consistent with the current rating category. DBRS expects the Company to use free cash flow and issue incremental debt for acquisitions and share repurchases such that leverage remains within its newly set financial policy guidelines (i.e., a net debt-to-EBITDA ratio of up to 2.5x).

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union

The applicable methodology is Rating Companies in the Publishing Industry, which can be found on our website under Methodologies.