2008-04-04 23:21:51 -
- Following the completion of MoneyGram International Inc.'s (MoneyGram) (NYSE: MGI) recapitalization including the issuance of $1.5 billion in a combination of secured debt and preferred shares, Fitch has resolved its Rating Watch Negative status on MoneyGram by lowering the company's Issuer Default Rating (IDR) to 'B+' from 'BB-.
Fitch has also assigned the following ratings to MoneyGram's wholly
owned subsidiary, MoneyGram Payment Systems Worldwide, Inc. (Worldwide):
--Issuer Default Rating (IDR) at 'B+';
--Senior secured first lien credit facility at 'BB/RR2'; and
--Senior secured second lien notes at 'B/RR5';
Fitch has withdrawn MoneyGram's senior unsecured debt rating.
The Rating Outlook on all ratings is Negative.
The downgrades are based on the following considerations:
--MoneyGram's leverage (total debt with equity credit / total operating EBITDA), based on Fitch estimates, has increased to approximately 6 times (x) pro forma for the company's completed recapitalization from 3x as of Sep 30, 2007.
--Fitch expects MoneyGram's debt balance will increase over the next several years due to the accretion of the company's PIK interest on its $760 million of preferred shares with minimal ability to reduce debt from free cash flow generation.
--Fitch expects the profitability of MoneyGram's Payment System business to be reduced to a negligible amount for the foreseeable future as the company alters its business strategy. Fitch estimates that the Payment Systems business historically contributed approximately 20% to total EBITDA.
The Negative Outlook reflects the following considerations:
--Fitch believes that the change in MoneyGram's investment portfolio strategy to consist primarily of cash and cash equivalents, U.S. agencies and agency residential mortgage backed securities could negatively impact profitability in the Global Funds Transfer (GFT) segment which historically accounted for approximately 80% of total EBITDA. Investment revenue in the GFT segment historically represented approximately 10% of segment revenue.
--MoneyGram could be negatively impacted in its ability to compete for agent relationships in the Global Funds Transfer business going forward due to the significant increase in leverage and limited financial flexibility following the recapitalization of the company. Fitch believes some agents do consider the strength of a remittance provider's balance sheet in evaluating potential relationships. However, MoneyGram recently extended its agreement to offer MoneyGram money transfer services in all domestic WalMart stores through January 2013. WalMart historically accounted for approximately 20% of total revenue.
--MoneyGram is the subject of an informal inquiry by the Securities Exchange Commission regarding its financial statements, reporting and disclosures related to MoneyGram's investment portfolio and offers and negotiations to sell the company and assets.
Credit strengths include the solid market position of MoneyGram as the second largest global provider of international money transfers as well as Fitch's expectation for the long-term growth and stability of the money transfer industry.
Fitch estimates MoneyGram's total debt, pro forma for the recapitalization plan, is approximately $1.8 billion and includes $145 million outstanding under the company's $250 million secured revolving credit facility which matures in March 2013; $350 million outstanding under secured term loans included in the revolving credit facility which also mature in March 2013; $500 million of 13.25% senior secured second lien notes which mature in March 2018; and $760 million in 10% Series B preferred shares to which Fitch assigns 75% equity credit due to the strong-equity like characteristics of this particular instrument. As a result, Fitch estimates total adjusted debt with equity credit to be $1.3 billion versus $700 million prior to the recapitalization. MoneyGram historically had drawn on a $400 million off-balance sheet receivables securitization facility related to its money order business however the company repaid all outstanding amounts and terminated this agreement in January 2008.
Fitch estimates liquidity pro forma for the recapitalization to be adequate and includes approximately $100 million available under the company's revolving credit facility and $395 million in unrestricted assets. MoneyGram historically has categorized its entire cash balance as substantially restricted due to the liquidity requirements of its Payment Systems business.
The Recovery Ratings (RRs) for MoneyGram reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of MoneyGram, and hence recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation scenario. In deriving a distressed enterprise value, Fitch applies a 20% discount to MoneyGram's estimated pro forma operating EBITDA of approximately $200 million which is equivalent to Fitch's estimate of total cash interest expense, maintenance capital spending and rent expense for MoneyGram. Fitch then applies a 6 times distressed EBITDA multiple, which considers MoneyGram's current multiple and that a stress event would likely lead to multiple contraction. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event. Fitch also adjusts MoneyGram's distressed enterprise value for liquidity requirements to cover any estimated shortfall in restricted asset coverage for a stress scenario. The 'RR2' for MoneyGram's senior secured first lien bank facility reflects Fitch's belief that 71%-90% recovery is realistic. The 'RR5' for MoneyGram's senior secured second lien reflects Fitch's belief that 11%-30% recovery is realistic.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Jason Paraschac, +1-212-908-0746
Nick P. Nilarp, CFA, +1-212-908-0649
Melissa L. Link, CFA, +1-212-908-0611
Brian Bertsch, +1-212-908-0549 (Media Relations)
