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Fitch's Ratings for IHS Markit Unaffected by Add-On Offering
July 10, 2017 / 1:56 PM / in 3 months

Fitch's Ratings for IHS Markit Unaffected by Add-On Offering

(The following statement was released by the rating agency) NEW YORK, July 10 (Fitch) IHS Markit Ltd. (IHS Markit; Nasdaq: INFO) announced today it is offering $250 million of additional notes under the indenture governing its existing $500 million 4.75% senior notes due 2025 (Fitch's 'BBB' rating is unaffected by this issuance). IHS Markit stated it intends to use the net proceeds from the offering for general corporate purposes which may include repayment of indebtedness or share repurchases. Fitch affirmed IHS Markit's 'BBB' long-term Issuer Default Rating (IDR) and its senior unsecured notes rating of 'BBB', with a Stable Outlook, on May 30, 2017. At that time Fitch expected IHS Markit will maintain its leverage (total debt with equity credit to operating EBITDA) at or below 3x over the ratings horizon, consistent with the company's 'BBB' IDR. Today's offering does not materially change that expectation and as a result Fitch has not taken any rating action. IHS Markit's offering underscores Fitch's stated expectation at the time of its affirmation that the company will likely continue to operate with reduced headroom due to higher share repurchases, expected acquisitions and associated future debt issuance. Insofar as the present offering's proceeds are used for paying down existing debt, Fitch continues to expect IHS Markit to maintain roughly 0.2x to 0.1x headroom to Fitch's negative rating sensitivity over the rating horizon. However, rating action could be warranted if offering proceeds are not used to pay down existing debt in conjunction with (1) operating performance weakness or (2) shareholder capital returns or leveraged acquisitions above Fitch's current expectations. KEY RATING DRIVERS Merger Benefits on Track: IHS Markit's ability to deliver on $125 million in cost synergies through the end of FY2019 is supported by progress on the merger and by management's guidance to upsize FY2017 synergies by $15 million to $50 million. Management has targeted $100 million in run-rate revenue synergies by 2019, which appears likely based on early signs of cross-selling deal wins, a steadily increasing pipeline, and plans to unify cross-customer views with a new CRM implementation. Other merger benefits include reduced legacy IHS exposure to the energy sector (26% in FY2016 from 40% in FY2015) and implementation of a leadership succession plan. Critical, Industry Embedded Datasets: Fitch believes IHS Markit's data sets are critical to its customers' workflow and difficult to replicate. The company's databases contain thousands of data points sourced from governments, customers, technical publications and other sources, in some cases dating back to the 1800s. Certain data, such as oil well data, requires synthesis by engineers and geologists to make it usable, adding an additional proprietary element to the asset. Financial indices are also embedded as critical inputs to large swaths of the capital markets and stand to benefit from ongoing shifts in passive management strategies. Relatively Stable Business Model: Subscription-based revenues accounted for about 84% of IHS Markit's pro forma combined FY2016 revenues and provide significant visibility and stability to FCF generation. The subscription-based business model capitalizes on longstanding client relationships with nominal account churn. However, recent experience in the Resources segment suggests that large, sector-wide slowdowns can and do impact recurring revenues. Recurring organic Resources revenue declined 9% in FY2016. While IHS Markit's diversification will help offset sector headwinds, ongoing challenges in the energy sector might persist for longer than expected, while challenges could mount in other sectors such as automotive, which accounted for approximately 21% of pro forma FY2016 combined revenues. Margin Expansion Potential: Fitch continues to expect EBITDA margins to expand to about 40% or a bit higher (from the low 30% range for IHS stand-alone) over the rating horizon based on the addition of Markit's higher margin business (42% EBITDA margin in FY2016), increased operating leverage at scale, and realization of $125 million in annual run-rate cost synergies. However, Fitch expects that margin expansion will also be contingent upon executing successfully on the company's strategic priority to harness new technologies, develop higher-value data analytics, and create new product offerings. Fitch believes a clearer plan of execution for these goals would increase confidence that margin expansion targets can be achieved. More Aggressive Financial Policy, Leverage: Relative to its previous review, Fitch now expects IHS Markit to operate at the higher end of its existing total leverage target of 2.0x-3.0x. IHS Markit is likely to pursue higher levels of share repurchases and begin to target meaningful acquisitions, necessitating increased issuance needs over the ratings horizon. While Fitch still expects leverage to remain below 3.0x over the rating horizon, there is less headroom for commercial challenges owing to sector headwinds, and as a result there will be increased reliance on attaining margin expansion and expected revenue uplift. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for IHS Markit include: --Low- to mid-single-digit organic revenue growth, in line to a bit below the overall business information market due to continued near-term headwinds in the energy sector and expected moderation in the auto sector; --EBITDA margin expands to about 40%+ over the rating horizon based on addition of higher-margin Markit business (42% EBITDA margin in FY2016), increased operating leverage and realization of run-rate synergies; --Share repurchases of $1.2 billion in 2017 and $1 billion in each year over the rating horizon; --Likelihood of ongoing M&A, with potential for transaction sizes up to $500 million; --Annual FCF in excess of approximately $900 million to $1 billion over the rating horizon; --Additional debt issuance to partially fund share repurchases and acquisitions. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Implementation of a more conservative financial policy as evidenced by reduced share repurchases, acquisitions, and associated debt issuance, underscored by a leverage target of 2.5x or lower; --Strong organic revenue growth and margin expansion owing to resilience in the face of any sector headwinds, accelerating momentum in cross-selling efforts, and successful execution of strategic priorities around new product innovation and analytics. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Adverse operating performance, material acquisitions or shareholder-friendly actions that increase leverage over 3x without the expectation of deleveraging below that level within 18 months; --A weakening of IHS Markit's operating profile characterized by weak organic revenue growth and lack of margin expansion owing to sector headwinds, lack of traction in cross-selling efforts, and inability to drive new product innovation and analytics. Contact: Primary Analyst Kevin McNeil Director +1-646-582-9480 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jack Kranefuss Senior Director +1-212-908-0791 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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