DBRS Confirms Thomson Reuters Corporation's Issuer Rating at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed Thomson Reuters Corporation’s (Thomson Reuters or the Company) Issuer Rating, Unsecured Debentures rating and Unsecured Medium-Term Notes rating at BBB (high) and Commercial Paper rating at R-2 (high) and Preferred Shares rating at Pfd-3 (high). All trends are Stable. The confirmations follow the closing of the sale of 55% of Thomson Reuters’s Financial and Risk (F&R) business to private equity funds managed by Blackstone for approximately $17.0 billion in gross proceeds. An affiliate of Canada Pension Plan Investment Board and an affiliate of GIC invested alongside Blackstone. Thomson Reuters retains a 45% stake in the F&R business, which is now known as Refinitiv.

The agreement was originally announced on January 30, 2018, after which DBRS confirmed all Thomson Reuters’s ratings with a Stable trend (see “DBRS Confirms Thomson Reuters Corporation’s Issuer Rating at BBB (high) with a Stable Trend,” February 2, 2018) based on the detailed transaction and operating information presented at the time. DBRS today notes that the actual closing parameters of the transaction are consistent with those contemplated when the divestiture was initially announced.

The key factors of the strategic partnership are as follows: (1) Refinitiv will operate as a separate legal and operating entity with its own capital structure, (2) debt issued by Refinitiv is non-recourse to Thomson Reuters, (3) Thomson Reuters will not be formally obligated to provide future capital contributions to Refinitiv and (4) Refinitiv financials will be reported as a minority interest in Thomson Reuters’s consolidated results.

Thomson Reuters received approximately $17.0 billion in gross proceeds from the transaction. The use of the proceeds is modestly more beneficial in terms of DBRS’s credit analysis compared with what was originally contemplated when the transaction was announced and include the following:

(1) Up to $9.0 billion to fund a substantial issuer bid/tender offer launched on August 28, 2018 (combined with share repurchase programs announced in May and June 2018, total 2018 repurchase activity is estimated to be approximately $10.0 billion); this is at the mid-range of the initial $9.0 billion to $11.0 billion estimate.

(2) Pay down $4.0 billion in Thomson Reuters debt through the redemption of $1.7 billion of debt securities announced on September 5, 2018; a $650.0 million cash tender offer across various maturities announced on September 19, 2018; and the repayment of approximately $1.6 billion in short-term facilities; this is higher than the initial estimate of about a $3.0 billion reduction in debt.

(3) Approximately $2.0 billion of capital available to pursue acquisition opportunities in the Company’s Legal and Tax and Accounting businesses, which is at the midpoint of the initial $1.0 billion to $3.0 billion estimate.

(4) An estimated $1.0 billion for the payment of cash taxes, transaction expenses and other costs required to right size the new Thomson Reuters entity, which is below the initial estimate of $1.5 billion to $2.5 billion.

Since the initial announcement of the transaction, Thomson Reuters has reported two quarters that continue to support DBRS’s pro forma view of the Company. As noted when the Refinitiv transaction was announced, Thomson Reuters’s business risk profile is less diversified in terms of operating verticals and geographic exposure post-transaction. However, DBRS notes several mitigating factors: (1) the percentage of recurring revenue is expected to increase modestly toward the high 80% range (2) DBRS anticipates a lower level of fluctuations in operating results through the business cycle given the absence of the relatively more volatile F&R business and (3) there is expected to be an improvement (i.e., lowering) in customer concentration, as the F&R business had several large clients. Further mitigating the modest softening of Thomson Reuters’s business risk profile, DBRS expects the Company to move toward mid-single-digit organic growth through several revenue growth initiatives across the organization, which are expected to have a positive impact over the next 12 months to 24 months.

The financial risk profile of Thomson Reuters is expected to remain similar to the pre-divestiture entity but has improved modestly from what DBRS contemplated when the transaction was announced on January 30, 2018. DBRS expects total debt-to-EBITDA to be below 2.5 times (x) at close. EBITDA coverage is expected to be above 8.0x, representing an improvement over DBRS’s initial forecast of over 7.0x when the transaction was initially announced. Similarly, cash flow from operations-to-debt, excluding one-time items (applicable taxes, legal expenses, transaction fees, etc.) related to the transaction, is expected to be above 30% compared with DBRS’s initial estimate in the mid-20% range. Going forward, Thomson Reuters’s operating cash flow should adequately finance its capital expenditures (capex) and dividends (prior to dividend reinvestment plan (DRIP) participation), which should enable the Company to maintain its long-term financial leverage target of 2.5x net debt-to-EBITDA. However, the ratings could be pressured should lease-adjusted debt-to-EBITDA increase above 2.5x for a sustained period of time with a corresponding deterioration in coverage and cash flow metrics as a result of either weaker-than-expected operating income and/or more aggressive financial management.

DBRS’s ratings continue to reflect the Company’s well-entrenched market position, the diverse nature of its customer base and its strong free cash flow–generating capacity. The ratings also consider intensifying competition, the need for constant innovation and the risks associated with the Company’s transformation. The Stable trends reflect Thomson Reuters’s operating expertise in the Legal and Tax and Accounting segments, high degree of revenue visibility and long-term anchor contract in news, as well as DBRS’s favourable view of the future growth profile of the Company.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Publishing Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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