Last week, Standard & Poor's Ratings Services (S&P)
revised its outlook on
NYSE Euronext Inc.
) to negative from stable, based on the company's dismal financial
performance in the second quarter of 2012. However, the rating
agency has asserted the company's credit ratings for the time
Accordingly, S&P affirmed NYSE's counterparty credit rating
at "A+/A-1," senior unsecured debt at "A+" and its commercial paper
at "A-1," although the outlook now remains negative. The revised
outlook elucidates on the rating agency's creditability, since the
company's cash and operating cash flow appear under pressure and
does not look impressive. NYSE has debt obligations worth $750
million in June 2013.
Moreover, the rating agency is already wary of NYSE's current
liquidity. The company's liquid assets can hardly cover three
months' operating expenses.
NYSE has been wooing its investors with consistent dividends and
share buybacks amidst the declining trend of its operating margins
and operating cash flow. The company deployed $450 million on share
repurchases and dividend payments in the first half of 2012, which
were higher than $400 million of funds allotted for operations.
As of June 30, 2012, NYSE's total debt stood at $2.3 billion,
higher than $2.1 billion at 2011-end. At the end of the reported
quarter, cash and cash equivalents, investments and other
securities were $416 million, down from $432 million at the end of
As a result of higher capital expenditure and debt, NYSE's
debt-to-EBITDA ratio also deteriorated to 2.1x from 1.6x recorded
at the end of 2011, which was the lowest level since the inception
of this organization in April 2007.
Further, NYSE reported second-quarter 2012 operating earnings
per share of 51 cents, a penny higher than the Zacks Consensus
Estimate of 50 cents. However, it was quite lower than 61 cents
recorded in the year-ago quarter. Consequently, operating net
income plunged 20% year over year to $128 million from $160 million
in the year-ago quarter.
Net revenues stood at $602 million, sliding 8.9% from $661
million in the prior-year quarter. It also came lower than the
Zacks Consensus Estimate of $606 million. The deteriorating
performance was primarily due to decelerated performance across
board, particularly weak revenues from transaction, clearing fees
and market data, which contribute about 75% to the gross
Moreover, volumes declined across all global derivatives and
cash trading venues. Alongside, unfavorable currency fluctuations
and lower average revenue per contract added to the woes. These
downsides were partially offset by a dip in expenses, although
margins continued to be weak.
However, during the second quarter of 2012, NYSE also entered
into a three-year senior unsecured credit facility agreement worth
$1 billion, scheduled to mature on June 15, 2015. This financing
replaces NYSE's existing $1.2 billion credit facility, which it
entered in 2007 and was scheduled to mature on July 31, 2012.
The new revolving bank facility is projected to be utilized for
general corporate purposes. S&P believes this credit facility
should be able to provide cushion to NYSE's liquidity crunch.
Conversely, the usage of credit facility can further weigh on
the borrowing costs and thereby hampering margins. Even the current
rate of expense control would be of little help to the fundamental
growth. Hence, the current volatile economic environment warrants a
much more strict expense management in order to sustain growth and
accumulate enough cash to cover at least six months of operating
expenses, excluding depreciation and amortization.
Moreover, given the tough state of competition in the industry,
primarily from arch-rivals such as
CME Group Inc.
), amid the failure and termination of NYSE's merger with
Frankfurt-based Deutsche Boerse raises ample operating risks for
the company. Significant fiscal and monetary policies are also
required to be taken for controlling the debt- and
Overall, these factors validate S&P's cautious outlook and
do not indicate any scope of upgrade for the next 1.5-2 years. On
the flip side, the rating affirmation also credits the company's
strong business and risk profile along with its leading market
position as well as its investments in long-term growth, which
again leads to financial risk cycle that the company is already
facing currently. NYSE carries a Zacks Rank #3, implying a
short-term Hold rating.
CME GROUP INC (CME): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis
NYSE EURONEXT (NYX): Free Stock Analysis Report
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