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Attractive yield pick-up in Thomson Reuters relative to Moody’s
admin | September 27, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Longer dated TRICN paper (Baa2(n)/BBB/BBB+) presents an attractive yield pick-up relative to Moody’s Corporation (MCO – BBB+/BBB+) with a minimal give-up in ratings. Specifically, a swap out of MCO 4.875% 12/17/48 and into TRICN 5.85% 4/15/40 provides for a pick-up of approximately 100 bp (g-spread). Comparatively, a swap out of MCO 3.25% 1/15/28 into TRICN 3.35% 5/15/26 is much flatter with a pick of only 20 bp (g-spread). Furthermore, the swap is currently trading at the wides for the year, approximately 17 bp off the average differential. While MCO cannot rate their own bonds, investors would only be giving up one notch on the S&P side as Fitch currently rates both credits BBB+. The credits are similar in size from a market capitalization and top line perspective.
Exhibit 1: TRICN vs MCO curve summary
Source: Bloomberg
Exhibit 2: TRICN vs MCO spread summary
Source: Bloomberg
Conservative financial policies
TRICN has a track record of using divestiture proceeds for debt reduction. Most recently, TRICN repaid roughly $4 billion of debt in 4Q18 following the sale of 55% of the company’s Refinitiv unit to an investment consortium for $17 billion, in an effort to offset the EBITDA loss. The remainder of the proceeds went to reduce the company’s share count by 200 million (to 500 million) for approximately $10 billion, create an investment vehicle to fund M&A opportunities of $2 billion, and to fund one-time costs associated with the sale. While M&A will be an integral part of TRICN’s growth strategy, TRICN is expected to participate in small to medium sized transactions, versus large transformational deals. TRICN has noted that they will look to acquire closely aligned businesses that complement their existing software and tools, thereby fortifying current product platforms. That said, the company’s last three acquisitions (Capital Confirmation, HighQ Solutions and Integration Point) were all of tuck-in size with no financial terms disclosed.
Leverage solid for the ratings
With the aforementioned debt reduction, TRICN’s net leverage now stands at roughly 2.3x, or 2.4x total debt/EBITDA. In the net leverage calculation, the $2 billion of cash on the balance sheet that is set aside for the investment fund is stripped out. If that $2 billion is included, net leverage would be 0.85x. Management has reiterated its commitment to maintaining net leverage at 2.5x or below. Based on management’s increased EBITDA guidance for FY19, estimates are that TRICN will end the year with net leverage in the 2.1 to 2.2x area. This compares to net leverage and total leverage of 2.0x and 2.5x, respectively, at MCO.
Recurring revenue base provides for earnings stability
Given the subscription/contract nature of services that TRICN provides, roughly 80% of the company’s total revenues are recurring in nature. For the company’s three largest business units (legal/corporates/tax), recurring revenues represent nearly 90% of revenues. The high level of recurring revenues provides for stability to earnings, margin improvement and steady free cash flow growth. In 1H19,TRICN saw recurring revenues up 130 bp organically year-over-year. Management is forecasting similar recurring revenue growth in 2H19. Management is likely to look for additional acquisitions that further support the recurring revenue model.
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