The Long and Short

Still like Western Union

| July 28, 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.

Western Union (WU) bonds continue to trade at an attractive discount to similarly rated payment processing peers, following strong operating results and guidance through the second quarter of 2023. WU is indicated wide to all the names in the IG peer group in the short and intermediate part of the curve. Management has not tapped the public debt markets since 2021, and investors should not rule out a new issue to meet upcoming debt maturities. But a public launch could lend some price discovery to the issuer, as existing WU bonds tend to trade infrequently in sufficient size.

The Company reported second-quarter earnings earlier this week, with adjusted EPS of $0.51 coming in well ahead of the $0.39 consensus estimate. Top-line revenue was up nearly 3% year-over-year at $1.17 billion, which also topped the $1.05 billion consensus forecast for the quarter. Management raised full-year guidance for adjusted EPS to $1.65-to-$1.75 from $1.55-to-$1.65, which is now ahead of the $1.62 analysts’ consensus estimate. Much of the success in the second quarter was attributed to a sharp revenue increase in Iraq. Growth in customer-to-customer transactions was at the highest level since 2021.

The company’s closest peers include FI (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 (Baa2/BBB) generally trades wide (Exhibit 1).

Exhibit 1. WU versus IG payment processor comps

Source: SanCap, Bloomberg/TRACE BVAL indications only

The Issue: WU 1.35% 03/15/26 @ +125/3Y, G+112, 5.81%, $89.29
Issuer: Western Union Co (WU)
CUSIP: 959802AZ2
Amount Outstanding: $600 million
Ratings: Baa2/BBB
Global Deal

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.

While WU’s business model has long been under pressure from technological advances of rival services and the ascension of digital competitors, such as PayPal or Venmo and Zelle, active migration patterns and global events continue to foster a need for this traditional service and have mitigated revenue erosion over the years. WU also continues to make inroads in advancing its own digital platforms, often through strategic partnerships. In short, WU’s customers’ reliance on extremely fast and reliable remittance service has proven far more resilient to competitive pressures than many have been predicting over the past two decades.

According to the most recent annual data from 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 roughly 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 2-3x range since 2018 and was slightly elevated at 2.77x as of the second quarter, with a net debt-to-EBITDA ratio of just 1.21x. The company’s cash balance stands at just under $1.6 billion versus its total debt balance of $2.8 billion. EBITDA-to-interest expense coverage has also been in double digits for the past three years running.

Near-term debt maturity and liquidity needs remain highly manageable. WU already retired the $300mm that matured in the current year without tapping the debt markets. There is nothing due next year, and then $500mm in 2025 and $600mm in 2026. In addition to its sizable cash on balance sheet, WU has the entirety of its $1.46 billion revolving credit facility available if debt markets prove challenging over the near-term.

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

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