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Moody's Downgrades FTI Consulting's Notes on Refinancing

Zacks Equity Research

Moody’s downgraded the rating for the senior notes of FTI Consulting, Inc. FCN, a business advisory firm, by one notch to Ba3. The ratings downgrade was provoked as the company used borrowings under its revolving credit facility to redeem its outstanding $400 million of senior unsecured notes due 2020 via a cash tender offer. The ratings reflect the refinancing of senior unsecured debt mostly from senior secured borrowings, and will be withdrawn as and when the notes are fully redeemed.

The downgrade affects $300 million of the company’s senior unsecured notes due 2022 and $400 million of senior notes due 2020. Baa2 is a speculative grade rating and indicates the presence of substantial credit risk.

FTI Consulting will use $150 million of cash on hand and $277 million of borrowings under its senior secured revolving credit facility to fund the redemption of $400 million of senior notes. The debt redemption will ease the burden on FTI Consulting's credit profile, as reducing EBITDA and excess cash being allocated for acquisitions and share buybacks had increased its leverage.

Moody’s also affirmed the company’s Corporate Family Rating ("CFR") of Ba2, Probability of Default Rating of Ba2-PD and speculative grade liquidity rating of SGL-1.

The CFR of Ba2 reflects FTI's modest financial leverage and strong free cash flow levels relative to debt that translates to lower business risks. SGL-1 rating is a sign of good prospective liquidity, supported by strong free cash flow generation and undrawn balance under the company’s revolving credit facility.

FTI Consulting could win an upgrade if it generates robust growth in top line and shows sustained profit expansion, such that total debt to EBITDA could be maintained below 2.5x. On the other hand, ratings may get negatively affected in case of a substantial decline in revenues and erosion in profitability. Also, aggressive financial policies might negatively impact FTI Consulting’s ratings.

FTI Consulting currently sports a Zacks Rank #3 (Hold). Some better-ranked stocks in the consulting industry that are worth considering include Bureau Veritas SA BVRDF and Hill International, Inc. HIL, both carrying a Zacks Rank #1 (Strong Buy), and Accenture plc ACN, holding a Zacks Rank #2 (Buy).

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