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Rating Action: Moody's downgrades Intercontinental Exchange's ratings to A3/Prime-2, outlook stable
Global Credit Research - 07 Aug 2020
New York, August 07, 2020 -- Moody's Investors Service (Moody's) has downgraded Intercontinental Exchange, Inc.'s (ICE) senior unsecured debt rating to A3 from A2 and downgraded its commercial paper rating to Prime-2 from Prime-1. ICE's outlook is stable.
The rating action followed ICE's 6 August announcement that it has agreed to acquire Ellie Mae, Inc. (B3 stable) and plans to issue $9.25 billion debt to fund the bulk of the $11 billion purchase price.
ICE expects to close the transaction late in the third quarter or early in the fourth quarter of 2020. Upon closing, Moody's plans to withdraw Ellie Mae's ratings because all of its debt will be repaid as part of the transaction.
A complete list of ICE's affected ratings can be found at the end of this press release.
ICE's ratings were downgraded because of the significant increase in debt leverage that will be incurred for the acquisition and the associated loosening of its target debt leverage to a range of 2.75-3.0x from 2.3x previously. ICE plans to more than double the size of its existing debt to $17.7 billion by issuing a mix of commercial paper, bank debt and bonds. This will result in approximately 4.4x Moody's-adjusted proforma debt leverage at the time of the acquisition and based on Moody's projections it will take about three years for ICE to delever to its new target.
ICE has committed to using excess cash flows for delevering and indicated it will cease share repurchases until it has reached 3.25x debt leverage, which it expects to occur by the end of 2022. Moody's said these commitments were a key factor in ICE's long-term rating not being downgraded by a further notch. "In previous large acquisitions of IDC in 2015 and NYSE Euronext in 2013, ICE demonstrated a strong track record in achieving its committed delevering targets," said Donald Robertson, Moody's Senior Vice President. "However, ICE's proforma initial leverage will be significantly worse than for these previous deals that were each below 3x and consequently it will take longer to delever," said Robertson, "thereby exposing creditors to incrementally more credit risk."
Moody's said that corporate governance considerations were among the key factors behind the rating action. The inherent credit risk associated with ICE's propensity for large debt-funded M&A continues to be reflected in a one-notch downward adjustment for corporate behavior in ICE's rating configuration. Related governance considerations were the high proportion of debt used to fund the purchase price, the change in financial policy concerning the debt leverage target and the company's commitment to cease share repurchases until it has substantially delevered.
Moody's said that ICE's ratings are supported by the reliably strong cash flow generating characteristics of its existing diverse business activities, driven by pretax margins that are typically in the range of 45-50%. The acquired business will contribute roughly 10-15% of ICE's total net revenue, and accordingly ICE will not be overly-reliant on Ellie Mae's cash flows to contribute towards delevering, said Moody's.
Moody's said the planned acquisition significantly accelerates ICE's strategy to strongly grow revenue by digitizing and enhancing the US residential mortgage flow life-cycle. Ellie Mae's cloud-based mortgage origination platform and related software solutions for the residential mortgage industry is significantly larger than ICE's existing fast-growing Mortgage Service businesses, and is well-aligned with them. These existing businesses are electronic mortgage service-provider Simplifile, acquired in 2019, and the Mortgage Electronic Registration System, the electronic database that tracks the servicers and beneficial owners of US residential mortgages, that ICE secured a majority ownership of in 2016 and fully-acquired in 2018.
ICE's stable outlook is predicated on Moody's assessment that it will continue to generate strong cash flows that will be used to delever and it will remain committed to ceasing share repurchases until it has substantially delevered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
ICE's ratings could be upgraded should it change its financial policy towards a stronger level of targeted debt leverage and successfully delever.
ICE's ratings could be downgraded should it suffer reduced cash flow generation capacity, recommence share repurchases or make another debt-funded acquisition before delevering is substantially completed, or shifts to a weaker debt leverage target. A material operational or risk control failure or change in regulatory requirements that would worsen its holding company's financial position through increased capital or liquidity needs at its clearing houses could also result in a downgrade.
..Issuer: Intercontinental Exchange, Inc.
....Senior Unsecured Shelf, Downgraded to (P)A3 from (P)A2
....Commercial Paper, Downgraded to Prime-2 from Prime-1
....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2
..Issuer: Intercontinental Exchange, Inc.
....Outlook, Remains Stable
The principal methodology used in these ratings was Securities Industry Service Providers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187116. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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 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_1133569.
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.
 Form 8-K (SEC) 06-Aug-2020
Please 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.
Donald Robertson Senior Vice President Financial Institutions 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 Ana Arsov MD - Financial Institutions Financial Institutions 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
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