Immediately after the announcement of the $8.2 billion
NYSE Euronext Inc.
) last week, Standard & Poor's Ratings Services (S&P) has
cast a concerned outlook on the merger, which is expected to
culminate by the first half of 2013, subject to the fulfillment
of regulatory compliances in the U.S. and Europe. The ratings
agency is skeptical about the raised debt amid weak
Accordingly, S&P assigned an issuer credit rating of
"A+/A-1" on NYSE. The company has also been kept under the
CreditWatch with negative implications. A CreditWatch acts as a
red flag and allows a company to monitor its actions before
causing a detrimental effect on ratings.
S&P's concern hovers around NYSE's inflated debt position,
which the company plans to carry in the merged company as well.
Higher debt and lower working capital in the first half of 2012
also impelled the ratings agency to downgrade NYSE's outlook to
negative from stable, in August 2012.
Further, with a long-term debt of $2.5 billion at the end of
the first nine months of 2012, NYSE bears the brunt of higher
borrowing costs, which further constricted the operating margins
to about 33% during the same period from 9% in the year-ago
period. At present, higher debt and capital expenditure has led
NYSE's debt-to-EBITDA ratio to deteriorate to 2.4x at the end of
September 2012 from 1.6x at 2011-end, which again underscores
ample financial and operating risks.
The rating agency is wary of NYSE's liquid assets, which may
hardly cover the operating expenses for three months. At such a
juncture when heavy capital expenditure is expected until at
least mid-2013, consistent dividends and share buybacks amidst
declining operating margins and operating cash flow only augment
business risks. Hence, S&P does not expect any rating
upgrades over the next two years.
The financial risks from the higher debt obligations do not
make this potentially strong merger any less risky. This is
due to the fact that IntercontinentalExchange plans to squeeze
all of its cash of $1.0 billion and raise another $1.8 billion
from its revolving credit facility. This leaves the combined
entity with a debt burden of about $4.7 billion and
debt-to-EBITDA ratio of 2.2x, according to the S&P, which
remains in a perilous state.
Nevertheless, the ratings agency is optimistic about ICE Clear
Europe providing clearing services to NYSE Liffe, as part of the
merger. This clearing pact allows NYSE to diminish the cost and
risk of building its own clearinghouse in London and mutually
benefit from the diverse product portfolio. Moreover, S&P
believes that NYSE is making efforts to reduce its debt
obligations through refinance and other activities. Even post
merger, the joint entity has the potential to improve its
operating cash flow and produce cost synergies worth about $300
million by 2014.
However, these actions would take quite a long time given the
company's capital and other extraordinary cost requirements of
about $150 million in 2013. Hence, a risky financial and
operating leverage could also shake investor confidence, and call
for an appropriate check and control system instantaneously.
IntercontinentalExchange carries a Zacks #3 Rank, which
implies a Hold rating in the short term, while the long-term
recommendation remains Neutral. However, NYSE holds a Zacks #4
Rank, which translates into a short-term Sell rating, while the
long-term recommendation remains Underperform.
INTERCONTINENTL (ICE): Free Stock Analysis
NYSE EURONEXT (NYX): Free Stock Analysis
To read this article on Zacks.com click here.