Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Broadridge Financial Solutions, Inc. (Broadridge) at 'BBB+'.

The Rating Outlook remains Stable. The IDR and security ratings affect approximately $4.2 billion of debt outstanding as of March 2022. Fitch has also affirmed the $1.5 billion senior unsecured revolver and senior notes at 'BBB+'.

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 U.S.

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 U.S. primary fixed income dealers, processes equities for seven out of the 10 largest global investment banks, and enables front office solutions for more than 25% of U.S. financial advisors.

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 $224-$544 million per year since FY14, although TTM FCF through March 2022 was weaker at $70 million due to new client implementations and what Fitch believes are unusual working capital items. Fitch expects FCF to improve over the next couple of years as growth and new client-related investments decline.

Conservative Balance Sheet: Gross debt/EBITDA is higher than historic levels at 3.3x at March 2022, but Fitch expects leverage to decline to the low- to mid-2.0x range in FY23-24. Fitch believes Broadridge will return to its historically conservative balance sheet following the May-21 Itiviti acquisition. Gross leverage ranged roughly 1.0x-2.0x over the past decade, but the company may manage to moderately higher leverage in the low to mid-2.0x range. Its current target is 2.5x adjusted gross debt/EBITDAR, or low 2.0x after rent expense. Management is committed to an investment grade rating, at least partly to limit potential concerns from regulatory agencies and financial services clients.

Acquisitive Growth Strategy: Broadridge's $2.6 billion Itiviti acquisition in May 2021 was its largest deal to date and brings execution risk with higher balance sheet leverage. However, this risk is moderated somewhat by Broadridge's historically disciplined approach to leverage, and Fitch believes it will deleverage in FY23. Fitch expects Broadridge to remain acquisitive while returning cash to shareholders within the context of its leverage target. The company spent more than $4.3 billion on M&A since FY2013, mostly on smaller tuck-in deals prior to its Itiviti purchase. Integration and execution risk are important to monitor as a credit risk.

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 U.S. proxy services business, which comprises a meaningful component of its revenue and operating profit, but faces a range of direct competitors as well as in-house technology alternatives in its financial services and mutual fund services businesses. Its dominant market position in the largest piece of its business (proxy distribution) and the largely stable, recurring nature of its business model are key factors considered within the rating derivation. Fitch believes it is also appropriate to compare Broadridge to other issuers in the business services and technology industries.

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 Itiviti acquisition, with more balanced capital allocation over time between M&A, dividends, and share repurchases.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 March 2022, the company had $214 million of readily available cash on its balance sheet (excluding approximately $63 million of cash held by regulated entities) and $1.1 billion of capacity under its $1.5 billion senior unsecured revolver.

The company also generates a significant amount of post-dividend FCF that averaged $248 million (post-dividend) from FY2008-FY2021. TTM FCF as of March 2022 was much weaker at $70 million, but Fitch believes the soft FCF trends in recent quarters is related to working capital initiatives, growth investments and likely some one-time Itiviti-related costs that should decline in FY2023-2024.

Debt Structure: Broadridge historically managed its balance sheet conservatively and relies solely on unsecured debt. The 2021 Itiviti acquisition increased debt outstanding, but Fitch projects the company will use excess FCF in FY23 to reduce its debt closer to historical levels of leverage. Approximately 54% of outstanding debt at March 2022 was fixed while the balance was floating rate debt, although this mix will fluctuate depending upon the amount drawn under the revolver and reduction of its term loan in the coming years.

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

(C) 2022 Electronic News Publishing, source ENP Newswire