Global Administrative Services Company Computershare Ltd. Rated #BBB# With Stable Outlook

Stocks and Financial Services Press Releases Friday May 25, 2018 09:47
MELBOURNE--25 May--S&P Global Ratings

MELBOURNE (S&P Global Ratings) May 25, 2018--S&P Global Ratings today said it has assigned a 'BBB' issuer credit rating to Australia-based business administration services company Computershare Ltd. The outlook is stable.

At the same time, we assigned our 'BBB' issue rating to the company's senior unsecured US$2 billion euro medium-term note program and proposed drawdown from this program.

The ratings reflect our view of Computershare's position as a global provider of business and corporate administration services, which mainly include share registry maintenance, mortgage servicing, corporate actions administration, and employee share plan management.

Computershare's well-established position in the global business administration services industry and access to high-quality and recurring earning streams underpin the rating. We factor an evolving business mix where core registry services face some pressure, while growth is largely driven by mortgage services. The company has a global footprint that includes operations mainly in the U.S., U.K., Canada, and Asia-Pacific. Computershare will acquire Zurich-based employee share plan business Equatex, which we view as complementary to the company's existing U.K.-based business. The purchase agreement is subject to regulatory approval.

We expect the registry business to face some challenges over the next couple of years as alternative service providers continue to penetrate the market with competitive prices. Computershare benefits from its strong incumbency in corporate share registry maintenance operations and administration services.

Computershare's historical customer churn is relatively low and its cost-out program should help support margins. We also expect the company to realize efficiencies by integrating robotics and process automation technology to reduce manual tasks.

Our rating incorporates the threat posed by technological disruption. In particular, blockchain technology has the potential to disrupt the registry business--it could be deployed across capital market systems including post trade clearing and settlement of securities. However, we believe Computershare is well-positioned to adapt to evolving technologies and changing market dynamics. Computershare continues to invest in SETL Development Ltd. (11.3% as of Dec. 31, 2017 with Board representation), a company that has deployed blockchain in the settlement and payment arena.

Mortgage services, comprising mainly Computershare's U.S. and U.K. businesses (19.4% of group EBITDA as of Dec. 31, 2017), are likely to drive the company's growth. The company's acquisition of the seven-year U.K. Asset Resolution contract in 2016 has positioned the company with good growth propects. Computershare is currently the U.K.'s largest third-party provider with more than 60% combined market share of the nonbank servicing segment. In the U.S., Computershare continues to focus on expanding its scale and has targeted an unpaid principal balance of US$100 billion (US$71.1 billion as of Dec. 31, 2017).

The structural shift in the U.S. market toward nonbank servicers provides Computershare with an opportunity to increase market penetration. However, the evolving market dynamic also exposes the company to competition from other nontraditional entrants. Computershare will need to continue to invest in its technology and compliance infrastructure to grow its market share and meet its regulatory requirements. We view the regulatory requirements set by regulatory bodies as demanding. This poses as both a risk as well as a meaningful barrier to entry.

Bolstering our assessment of the group's business risk is the company's margin income--interest income earned from the pool of client-owned cash balances. The company acts as an agent with respect to these funds. They are not recognized on the balance sheet nor available for general corporate purposes. We expect margin income to incrementally grow over the next couple of years in line with our interest rate assumptions. That said, our assessment captures the cyclicality associated with interest rate movements over the longer term. We expect Computershare to capitalize on rising interest rates.

We view a data or cybersecurity breach as the most material event risk, given the magnitude and sensitivity of confidential data held by the company. The impact of a breach could result in reputational, legal, and/or financial damage that could impinge on the overall creditworthiness of the business. That said, Computershare has a robust security framework, which should help protect against cyber attacks.

Supporting our assessment of Computershare's financial risk profile are its moderately conservative financial policies. Computershare has articulated a leverage ratio range of 1.75x to 2.25x (company measure that excludes Specialized Loan Servicing [SLS] advance debt) and has a track record of maintaining debt to EBITDA within this target range. The debt-funded acquisition of Equatex will be completed comfortably within this range on a pro-forma basis. The only recent deviation from these bands was in the year ended June 30, 2012, following a major debt-funded acquisition. We note, however, that the company returned to its target range within two years. Management has indicated that share buybacks will only occur when there is significant surplus cash.

S&P Global Ratings' leverage calculation includes the group's SLS advance debt. Computershare is required to fund mortgagor shortfalls in instances where the borrower has missed a principal or interest payment. The SLS advance facilities, which covers about 85%-90% of shortfalls, are nonrecourse and Computershare has a priority claim over repossessed assets.

Further supporting our assessment of the group's financial risk profile is the highly cash-generative nature of the group's operations. Computershare has relatively low capital requirements and most of its capital expenditures relate to IT. The group's stable free cash flows coupled with moderately conservative financial policies provide it with capacity for inorganic growth and shareholder returns while limiting pressure on its balance sheet.

Overall, we expect revenue to remain broadly flat as ongoing declines in the registry business are offset by growth in mortgage services and employee share plans. That said, we expect the company's cost-out program to support its margins. The program involves process automation, headcount reduction, and the establishment of a more cost-effective operating facility in North America.

We expect the group to maintain S&P Global Ratings-adjusted debt to EBITDA at around the 2x level over the next couple of years, with gradual deleveraging given the group's strong cash flow generation.

The stable outlook reflects our view of Computershare's recurring earnings base, low capital intensity, stable free cash flows, and moderately conservative financial policies. We expect the group to maintain S&P Global Ratings-adjusted debt to EBITDA (including SLS advance debt) at around 2x over the next couple of years.

We could lower the rating if we expected Computershare to sustain its debt to EBITDA above 3x. This could occur if the company were to undertake a large debt-funded acquisition without a credible strategy to deleverage shortly thereafter.

Downward rating pressure could also occur from heightened competition, technological disruption, or an unfavorable regulatory environment that affected Computershare's strong cash flow generation. A material erosion of margin income or unexpected operational issues such as a data or cybersecurity breach could also affect the rating.

We could raise the ratings if we expected Computershare to sustain its S&P Global Rating-adjusted debt to EBITDA (including SLS advances) below 2.0x, underpinned by a robust set of financial policies. Over the longer term, we could also raise the rating if the company materially increased its scale or diversified its business into uncorrelated business lines.

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