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Broadridge Financial Solutions Inc. -- Moody's affirms Broadridge at Baa1; revises outlook to negative following debt financed acquisition

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Rating Action: Moody's affirms Broadridge at Baa1; revises outlook to negative following debt financed acquisitionGlobal Credit Research - 30 Mar 2021New York, March 30, 2021 -- Moody's Investors Service ("Moody's) affirmed Broadridge Financial Solutions Inc.'s ("Broadridge") senior unsecured debt rating at Baa1 and revised the outlook to negative from stable. The negative outlook revision follows the announcement of Broadridge's planned debt funded acquisition of software provider Itiviti Holding AB ("Itiviti") in an all-cash transaction valued at approximately $2.5 billion expected to close by the end of FY21 (ending June)[1]. Broadridge plans to finance this transaction through a new $2.55 billion term credit agreement.Moody's believes the acquisition will improve the company's scale and product capabilities, particularly with respect to front office trading offerings for Broadridge's capital markets clients, while concurrently extending the company's international presence as well as adding product diversity to the overall business. However, this transaction will result in an entity with a meaningfully more levered capital structure. Pro forma LTM Debt/EBITDA (Moody's adjusted for operating leases and pensions) will increase to 3.5x at closing from about 2x prior to the transaction and Moody's projects that debt leverage after factoring in anticipated debt repayment will approximate 2.3x at the end of FY23.Moody's took the following rating actions:Affirmations:..Issuer: Broadridge Financial Solutions Inc.....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1Outlook Actions:..Issuer: Broadridge Financial Solutions Inc.....Outlook, Changed To Negative From StableRATINGS RATIONALEBroadridge's Baa1 senior unsecured debt rating is supported by the company's steady, recurring fee-based revenue and its leading position in proxy and other investor communication services which provides healthy business visibility and cash flow predictability. The company maintains a business model supported by the SEC's proxy filing requirements, long-term customer contracts, and the long-term growth of equity positions. In particular, the company's core Investor Communication Solutions segment ("ICS"), that accounts for over 70% of Broadridge's pro forma revenues, experiences little volatility as the vast majority of revenues are recurring annually and only a modest amount are derived from event-driven activities. The company's credit quality is also bolstered by the quality of Broadridge's management team which has demonstrated a solid track record in recent years for achieving stated operating performance targets and the company's largely independent board of directors which limits corporate governance concerns. However, Moody's believes that the Broadridge's higher leverage, shift to a more aggressive financial strategy with a raised leverage target of 2.5x , intensified pursuit of acquisitions to support overall revenue growth, and ongoing long term focus on shareholder returns including dividends and share repurchases present incremental credit risk. Additionally, despite Broadridge's recurring revenue model, the company has a business profile marked by relatively high customer and geographic concentration in the financial services industry, which is exposed to macroeconomic cyclicality, increased regulation, and the possibility for further consolidation.Broadridge's liquidity is supported by an available cash balance of $365.6 million and revolver availability under its multicurrency facility of nearly $968 million as of December 31, 2020. In addition, Moody's expects free cash flow (after dividends) of approximately $450 million over the coming year which is projected to be used principally for debt repayment associated with the Itiviti acquisition.The negative rating outlook reflects Moody's expectation of more aggressive financial policies that may lead to additional acquisitions and a higher leverage threshold. Moody's expects that Broadridge's revenues, on an organic basis, will expand at a mid single digit rate over the coming year with operating leverage benefits driving strong pro forma EBITDA growth during this period. Pro forma Debt/EBITDA is expected to decrease to 3x by the end of FY22.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSBased on Broadridge's negative outlook and current business profile, a rating upgrade is unlikely over the near term. Over the long term, the ratings could be upgraded if Broadridge maintains its leading market position while increasing its overall size and scale and sustains adjusted debt to EBITDA in the low 1x range.The ratings could be downgraded if revenues decline on a sustained basis, operating margins deteriorate towards 10%, or Broadridge's adjusted debt to EBITDA is expected to exceed 2.5x on a sustained basis.With projected annual revenues of more than $5.1 billion in FY22, Broadridge is the market leader in proxy distribution and processing services. The company also provides other investor communications, securities processing, securities clearing and operations outsourcing services for the financial services industry.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] 8K 27-Mar-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Lee Zeltser Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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