Fitch Ratings has affirmed the Issuer Default Rating (IDR) for
The Rating Outlook remains Stable. The IDR and security ratings affect approximately
Broadridge is a market leader or has a strong presence in each of its core segments, providing proxy and mutual fund document distribution for corporations and investment management firms, trade processing services for broker/dealers and other financial institutions, and a variety of other services and technology platforms that support these industries. The company historically managed its balance sheet conservatively and generated meaningful amounts of cash flow across the business cycle.
Key Rating Drivers
Strong Market Position: Fitch views Broadridge's strong and stable market positions in parts of its business as a key credit consideration. Its Investor Communications Solutions (ICS) segment comprises more than 70% of revenue and pre-tax earnings. Proxy services comprise a meaningful component of ICS, and Broadridge is the dominant market leader, providing proxy services for approximately 80% of outstanding shares in the
In its non-proxy business, the company's market share is much lower, but Fitch believes its market presence is still strong. The company serves 20-of-24
High Mix of Recurring Revenue: Fitch believes Broadridge's business model provides good visibility into revenue and cash flow, which was evidenced by minimal impact from the coronavirus pandemic. The company relies upon: (i) multi-year contracts across much of its business (average contract length of six years), (ii) a high mix of recurring sales (two-thirds of revenue), and (iii) a high client revenue retention rate (98% of recurring). Fitch expects Broadridge will sustain its competitive position given its long-term client relationships, integral services provided that enable customers to meet regulatory compliance requirements, and high switching costs associated with changing vendors.
Exposure to Regulatory Changes: Regulations impact Broadridge's business in a variety of ways. On the opportunity side, a large portion of its customer base includes financial services clients, asset management firms, and healthcare companies that are heavily exposed to regulatory changes. The company benefits from demand for services that enable its customers to navigate the evolving regulatory landscape and meet mandated requirements. On the risk side, regulatory changes over time could alter the competitive environment for the core proxy distribution business. However, any changes would be phased in over time, and Fitch does not expect any near-term regulatory shifts.
Strong and Steady FCF Generation: Broadridge has a long history of steady free cash flow generation that supports its ratings. FCF benefits from its market position in its core proxy business, stable EBITDA margins, and low capital intensity at approximately 2% of sales over the past decade. The company generated attractive post-dividend FCF of
Conservative Balance Sheet: Gross debt/EBITDA is higher than historic levels at 3.3x at
Acquisitive Growth Strategy: Broadridge's
Moderate Client Diversification: In recent years, 20%-22% of revenue came from its top five customers including large investment management firms and investment banks, with its largest client accounting for approximately 6%. This is down modestly from 25% in prior years as the company continues to diversify its mix, which may limit further concentration. Consolidation in the financial services industry could influence concentration over time, but certain trends driving consolidation among its customer base, including regulatory cost burdens, are favorable for the company.
Derivation Summary
Broadridge is the market leader in its
While EBITDA margins are below those of certain peers in Fitch's 'BBB+' rating universe, strong and consistent post-dividend FCF margins in the mid- to high-single digit percentage range are in-line with the group and Fitch-projected gross leverage below 2.5x is reasonable for the 'BBB+' rating category.
Key Assumptions
Organic revenue growth in the mid-single digit range with similar growth in both ICS & GTO segments.
EBITDA margins increase 20-50 basis points per year over the next few years, or modestly below management's guidance of 50bps per year.
Near-term cash uses allocated toward debt reduction following its 2021
Gross debt/EBITDA trends to the low- to mid-2.0x range by FY-end 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Broadridge's growth strategy results in greater business diversification to consider a higher rating, but that is unlikely to occur in the near term;
Gross leverage, Fitch-defined as Total debt with equity credit/Operating EBITDA, sustained below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A more aggressive capital allocation and/or financial policy;
Mis-execution on M&A that leads to materially higher leverage could also negatively affect the rating;
Gross leverage sustained above 2.5x in the absence of a credible de-levering plan.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: Broadridge has ample liquidity to execute on its growth strategy while funding shareholder returns outlined as part of its capital allocation policies. As of
The company also generates a significant amount of post-dividend FCF that averaged
Debt Structure: Broadridge historically managed its balance sheet conservatively and relies solely on unsecured debt. The 2021
Issuer Profile
Broadridge provides outsourced investor communications as well as trade processing technology & services to banks, broker-dealers, asset/wealth managers and corporate issuers. The company was founded in 1962 and trades on the NYSE under the ticker 'BR'.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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