Rating Action Overview

• Global business and corporate administrative services provider Computershare Ltd. (Computershare) announced a US$750 million acquisition of Wells Fargo Corporate Trust Services business to strengthen its North American corporate trust services franchise.
• Computershare will finance the total acquisition costs of US$1,007 million with debt and equity issuances; with incremental debt of around US$372 million to part fund the acquisition. Following the close of the transaction, we expect that Computershare's S&P Global Ratings adjusted debt to EBITDA will increase above 3.0x, which is outside our expectations for the 'BBB' rating. We expect management will undertake a credible deleveraging strategy and reduce debt to EBITDA over the 12-18 month period following completion of the transaction.
• We are revising our outlook on Computershare to negative from stable and affirming our 'BBB' long-term issuer credit rating on the company.
• The negative outlook reflects our view that the incremental debt burden to part fund the acquisition will cause leverage to increase above adjusted debt to EBITDA of 3.0x, and the company's credit metrics could remain above our tolerances for the 'BBB' rating level if it experiences any operational hurdles or integration efforts progress slower than we expect.

Rating Action Rationale

The negative outlook reflects our view that the acquisition of the Wells Fargo Corporate Trust Services business incorporates material integration risks and will cause Computershare's leverage to increase above our expectations for the 'BBB' rating.  The US$372 million incremental debt burden to part fund the acquisition will increase S&P Global Ratings adjusted debt to EBITDA above 3.0x. However, we see a credible deleveraging trajectory that returns the financial metrics to levels that support our expectation for the 'BBB' rating within 12 to 18 months after the transaction is completed. The negative outlook also incorporates the risk that Computershare's credit metrics could remain above the 3.0x level if it experiences any operational hurdles or acquisition integration efforts progress slower than we expect.

Computershare will need to navigate meaningful and complex integration challenges post acquisition.  In our view, there are inherent risks associated with an acquisition of this size and nature, including managing the complexities of integration, realization of synergies, the retention of key personnel, maintaining market leadership position in the U.S. corporate trust services market, the ability to achieve sustainable earnings growth, and potential operational missteps that lead to a prolonged contraction in profitability. However, we acknowledge Computershare's strong track record of successful past acquisition carve-outs and integrations, having completed around 60 acquisitions over the last 15 years.

We believe the proposed acquisition of the Wells Fargo Corporate Trust Services business expands and complements Computershare's existing corporate trust business.  The acquisition provides Computershare with a market-leading position in corporate trust services in North America, adding significant scale to its current operations. It also provides a relatively stable source of revenue supported by long-dated contractual arrangements and complements the group earnings profile. Despite risks of customer churn during the integration phase, we believe the company has a proven ability to maintain its position in highly competitive and fragmented markets globally.

In our view, Computershare has a credible deleveraging path post transaction completion to return its S&P adjusted credit metrics to below 3.0x.  Our credit metric tolerances for the 'BBB' rating level correlate to leverage remaining sustainably below 3.0x. This is commensurate with the top end of Computershare's target leverage range of 1.75x to 2.25x. At the 'BBB' rating level, we expect a reversion back below these levels in a timely manner over the next 12 to 18 months. S&P Global Ratings' adjusted leverage calculation includes specialized loan servicing (SLS) advance debt in the group's mortgage services segment. We view these to be debt-like obligations; however, we acknowledge the SLS advance facilities are nonrecourse and that Computershare has a priority claim over repossessed assets.

In our view, the company remains committed to maintaining the 'BBB' rating.  Computershare's public commitment to maintaining the 'BBB' rating indicates to us a financial policy that is consistent with our current rating. Articulating a deleveraging path and delivering on it will be a key indicator of management execution of this financial stance. We view that the proposed underwritten equity issuance to part fund this acquisition further supports this view. In addition, we believe Computershare would recalibrate shareholder returns or take alternative measures to ensure the deleveraging trajectory is not derailed.

Outlook

The negative outlook reflects the integration risk and incremental debt burden associated with Computershare' s acquisition of Wells Fargo Corporate Trust Services business, which will temporarily increase its adjusted leverage above 3x. The outlook also incorporates the risk that the company's credit metrics could remain above our tolerances for the 'BBB' rating if it experiences any operational hurdles or acquisition integration and synergy realization efforts progress slower than we expect.

Downside scenario

We could lower the rating if we expect Computershare to sustain its debt to EBITDA above 3x. This could occur if it experiences difficulty in integrating its acquisition or incurs unforeseen customer losses or other operational missteps that lead to a prolonged contraction in its profitability that prevents improvement in its S&P Global Ratings-adjusted debt to EBITDA (including SLS advance debt) remaining sustainably below 3.0x.

Downward rating pressure could also occur from heightened competition, technological disruption, or an unfavorable regulatory environment that affects Computershare's market positions and strong cash flow generation.

Upside scenario

We could revise our outlook on Computershare to stable if it demonstrates solid execution on its acquisition integration strategy, retention of key personnel, and maintains its market leadership position in the North American corporate trust services market, thereby improving its S&P Global Ratings-adjusted debt to EBITDA (including SLS advance debt) sustainably below 3.0x.

Our Base-Case Scenario

• Real GDP growth in Australia of 4.0% in 2021 and 3.2% in 2022, following a contraction of 3.4% in 2020;
• U.S. real GDP growth of 4.2% in 2021, 3.0% in 2022, and 2.2% in 2023; U.K. real GDP growth of 4.3% in 2021, 6.8% in 2022, and 2.2% in 2023;
• U.S. interest rate expectations (end of period policy rate): 0.13% for 2021, 0.12% for 2022, and 2023; U.K. interest rate expectations: 0.10% for 2021, 2022, and 2023;
• Gradual revenue growth of around 2%-4% a year over the next 24 months supported by consistent recurring revenue base and increased activity in cyclical businesses;
• Subdued S&P adjusted EBITDA margins of about 23%-24% over the next two years, driven by the low global interest rate environment and additional integration costs associated with the acquisition;
• An additional US$60 million in cost-out synergies over the next two years, as the company expands the cost-out opportunity in the U.K. mortgage services business;
• Capital expenditure (capex) of about US$80 million over the next few years, inclusive of initial capital investment to upgrade the IT infrastructure of the acquired business;
• Dividends in line with historical payout ratio levels; and
• SLS advances treated as debt-like obligations and included in our leverage and financial analysis.

Liquidity

We consider Computershare to have adequate liquidity. We forecast the company's sources of liquidity to exceed its uses by more than 1.2x over the next 12 months, and we expect net sources to remain positive, even if EBITDA declines by 15%. We expect the company's diverse recurring revenue base combined with the relatively stable revenue streams generated by the corporate trust business, to be supportive of revenue growth and cash flow generation to maintain adequate liquidity in the next 12 months. We believe the group has well-established, solid relationships with banks, as well as a generally high standing in credit markets.

We note Computershare is targeting to complete its acquisition of Wells Fargo's Trust business around Sept. 30, 2021. The company has announced the launch of a US$634 million underwritten pro rata accelerated renounceable equity issuance. In addition, the company will fund the remainder of the total acquisition costs of around US$1,007 million (inclusive of additional costs and capital regulatory requirements) with an incremental debt amount of approximately US$372 million. We believe Computershare's meaningful cash balance and undrawn bank lines of about US$750 million, together with the group's predominant recurring revenue base underpin the group's liquidity position.

As of Feb. 28, 2021, we expect Computershare to have the following sources and uses of liquidity over the next 12 months:

Principal Liquidity Sources

• Cash and cash equivalents of approximately US$435 million as of Feb. 28, 2021;
• Undrawn bank lines of approximately US$312 million;
• Our forecast funds from operations of about US$400 million;
• Proceeds from a proposed underwritten share issuance of approximately US$634 million.

Principal Liquidity Uses

• Upcoming debt maturities of about US$123 million;
• Capex of around US$80 million, inclusive of initial capital investments in the U.S. Trust business;
• Dividend distribution of around US$170 million-US$190 million; and
• Total acquisition costs of around US$1,007 million.

Covenants

We note the flexibility that Computershare has under the financial covenant of its U.S. private placement to exclude lease liabilities in the calculation of net debt to EBITDA. We understand the prescribed net debt to EBITDA ratio must remain below 3.25x. We expect the company to maintain sufficient covenant headroom, inclusive of the incremental debt burden associated with the proposed acquisition.

Ratings Score Snapshot

Issuer Credit Rating: BBB/Negative/--

Business risk: Satisfactory

• Country risk: Very low
• Industry risk: Intermediate
• Competitive position: Satisfactory

Financial risk: Intermediate

• Cash flow/Leverage: Intermediate

Anchor: bbb

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: Neutral (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: bbb

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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