DBRS Confirms Thomson Reuters Corporation at BBB (high) and R-2 (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed Thomson Reuters Corporation’s (Thomson Reuters or the Company) Issuer Rating as well as its Unsecured Medium-Term Notes and Unsecured Debentures ratings at BBB (high). DBRS has also confirmed Thomson Reuters’ Commercial Paper rating at R-2 (high) and its Preferred Shares rating at Pfd-3 (high). All trends are Stable. The ratings continue to reflect the Company’s well-entrenched market position, diverse customer base and its strong free cash flow-generating capacity. The ratings also consider intensifying competition, the need for constant innovation and exposure to macroeconomic conditions affecting Thomson Reuters’ professional services and banking clients.

The Company’s revenues declined modestly to $12.1 billion through last 12 months (LTM) Q2 2016. However, on a constant currency basis, revenues rose modestly, driven by growth in both the Legal and Tax & Accounting segments, which offset softness in Financial & Risk (F&R), amid challenging macroeconomic and geopolitical conditions. Cash flow from operations tracked growth in operating income rising to roughly $3.1 billion for the LTM Q2 2016. Total debt rose to $8.8 billion as of June 30, 2016, versus $8.4 billion at year-end 2015 and $8.1 billion in 2014. Thomson Reuters’ credit metrics remained adequate for the current rating category, with gross debt-to-EBITDA of 2.59 times (x) (2.68x swap adjusted), EBITDA coverage of 9.89x and cash flow-to-debt of 35% in LTM Q2 2016. DBRS notes that on July 11, 2016, the Company announced a definitive agreement to sell its Intellectual Property & Science (IP&S) unit (which accounted for roughly 8% and 9% of revenues and adjusted EBITDA, respectively, in 2015) for cash proceeds of $3.55 billion. The sale is subject to regulatory approval and is expected to close before the end of 2016.

Going forward, DBRS expects Thomson Reuters’ earnings profile to remain stable over the near to medium term, because of its recurring revenue base, improving organic growth and ongoing transformation strategy. DBRS expects low-single digit revenue growth in 2016 within the Company’s core business. As such, revenues should range between $11.3 billion and $11.4 billion in 2016 (excluding the IP&S unit), and climb modestly through 2017. Pressure on F&R revenues caused by ongoing commercial pricing adjustments and declining recoveries revenues is expected to abate somewhat through the second half of the year. EBITDA margins are expected to rise to roughly 28% for the full year, owing to cost-savings initiatives. As such, adjusted EBITDA should range between $3.1 billion and $3.2 billion in 2016. DBRS expects the Company to re-allocate some of the cost savings generated from the ongoing transformation program to drive organic revenue growth in fast growing market segments.

DBRS expects that Thomson Reuters’ financial profile will remain supportive of the current ratings. Cash flow from operations in 2016 should range between $2.5 billion and $2.6 billion (excluding the IP&S business), based on growth in core operating income. Capital expenditure (capex) is expected to be roughly $900 million, while cash dividends should remain fairly stable at around $1.0 billion in 2016. As such, DBRS forecasts that the Company should generate between $500 million to $600 million of free cash flow (before changes in working capital) in 2016. Thomson Reuters has stated that it intends to use roughly $1.0 billion of the net proceeds from the IP&S sale to repurchase shares; the remainder will be used to repay debt (primarily commercial paper) and invest in its core business. DBRS notes that while the Company’s acquisition activity has slowed in recent years, share buybacks have accelerated, with over $3.5 billion of share repurchases completed since 2013. The suggested allocation of proceeds from the IP&S divestiture continues to support DBRS’s view that Thomson Reuters has the ability and willingness to achieve and maintain its stated financial policy guideline of net debt-to-EBITDA of 2.5x. DBRS believes that the divestiture should result in a pro forma leverage ratio (gross debt-to-EBITDA) below 2.4x in 2016, which together with a solid interest coverage ratio leaves the Company well placed within the current rating categories.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Publishing Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.