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S&P Pares NYSE Rating a Notch

Zacks Equity Research

Standard & Poor's Ratings Services’ (S&P) concern over the $8.2 billion acquisition of NYSE Euronext Inc. (NYX) by IntercontinentalExchange Inc. (ICE) climbed higher as it trimmed the credit and debt ratings of NYSE. The ratings agency is skeptical about the raised debt amid weak fundamentals.

Accordingly, the ratings agency cut NYSE’s long-term issuer credit rating (:ICR) and senior unsecured debt rating to “A” from “A+.” S&P had kept NYSE on a CreditWatch with negative implications since Dec 2012, when it assigned an ICR of “A+/A-1” to the company. A CreditWatch acts as a red flag and allows a company to monitor its actions before causing a detrimental effect on ratings.

S&P remains wary of NYSE’s inflated debt position, which the company plans to carry in the merged company as well.With a long-term debt of $2.1 billion at the end of 2012, NYSE bears the brunt of higher borrowing costs, which further constricted margins. At present, higher debt and capital expenditure has led NYSE’s debt-to-EBITDA ratio to deteriorate to 2.5x at 2012-end from 1.6x at 2011-end, which again underscores ample financial and operating risks.

The ratings agency has also casted a concerned outlook on the merger, which is expected to culminate by the second half of 2013, subject to the fulfillment of regulatory compliances in the U.S. and Europe. The financial risks from the higher debt obligations do not make this potentially strong merger any less risky. 

This is due to the fact that IntercontinentalExchange plans to squeeze all of its cash of $1.0 billion and raise another $1.8 billion from its revolving credit facility. According to S&P, this leaves the combined entity with a debt burden of about $4.7 billion and debt-to-EBITDA ratio of 2.2x, which still remains in at a risky level. Hence, S&P expects to continue with the CreditWatch until the NYSE-IntercontinentalExchange deal culminates or falls apart.


While both NYSE and IntercontinentalExchange carry a Zacks Rank #3 (Hold), other strong performers in the financial sector include Euronet Worlwide Inc. (EEFT) and Moody’s Corp. (MCO), both of which carry a Zacks Rank #1 (Strong Buy).

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