The Long and Short

Reports of WU’s demise are grossly exaggerated

| February 10, 2023

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.

While Western Union’s (WU: Baa2/BBB) business model has long been under pressure from technological advances of rival services and the rise of digital competitors such as PayPal, Venmo or Zelle, active migration patterns and global events continue to create a need for this traditional service and have mitigated revenue erosion over the years. WU also continues to advance its own digital platforms, often through strategic partnerships. In short, WU’s customers’ reliance on extremely fast and reliable remittance has proven far more resilient to competitive pressures than many have been predicting over the past two decades. Good fundamentals and attractive pricing make WU’s bonds good relative value.

WU bonds are indicated at an attractive discount to similarly rated payment processing peers, such as FISV (Baa2/BBB) and FIS (Baa2/BBB); as well as the more direct digital competitors, including the lower-rated GPN (Baa3/BBB-) and higher-rated PYPL (A3/A-/A-). WU has not tapped the public debt markets since 2021. A new issue to meet upcoming debt maturities could lend some price discovery to the issuer, as the existing WU bonds trade infrequently in relevant size.

Exhibit 1. WU compared to investment grade comparables

Source: SanCap, Bloomberg/TRACE BVAL indications only

WU is a global leader in the cross-border payment market, operating through third party agents across its network of roughly 600,000 locations in over 200 countries. Around 90% of the company’s revenue is generated through consumer-to-consumer transaction. While digital transactions have made up a growing portion of the market over the past two decades, there remains, and likely will continue to remain, the need to send physical cash payments person-to-person, often cross border. Having said that, WU also reported a 30% increase in the fourth quarter in new customer growth in its own US outbound branded digital platform.

According to the most recent update by the World Bank, officially recorded remittance flows to low-and-middle income countries increased by over 5% in 2022 to roughly $626 billion, following a record recovery of over 10% in 2021. Western Union is estimated to have a 17% market share in cash-to-cash and account-to-cash remittances worldwide.

WU operates with sustainably low leverage and consistent debt metrics. The company’s gross debt-to-EBITDA ratio has remained steadily in the 2x to 3x range since 2018 and is at 2.45x as of fourth quarter 2022, with a net debt-to-EBITDA ratio of just 1.25x. The company’s cash balance stands at just under $1.2 billion compared to its total debt balance of $2.6 billion. EBITDA-to-interest expense coverage has also been in double digits for the past three years running.

Near-term debt maturity needs remain highly manageable. WU has $300 million maturing in the current year, followed by $500 million in 2025 and $600 million in 2026. In addition to its sizable cash on balance sheet, WU has the entirety of its $1.5 billion revolving credit facility available if debt markets prove challenging over the near-term.

The company reported fourth quarter and full-year 2022 earnings this week. Adjusted EPS fell just short of the consensus estimate of $0.35 per share at $0.32 per share. Meanwhile revenue was down 15%—or -6% on a constant currency basis—at $1.09 billion, which came in ahead of analysts’ consensus expectations of $1.07 billion. Revenue for the full-year 2022 was down 12%—or -4% on a constant currency basis. Management left guidance unchanged for 2023 from their prior estimates provided in late 2022. WU sees adjusted EPS of $1.55 to $1.65 for the year versus the consensus estimate of $1.58; while top-line revenue is expected to decline 7% to 9%—or 2% to 4% on a constant currency basis.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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