News Column

Fitch Affirms Pitney Bowes' 'BBB-' IDR; Outlook Revised to Stable

February 5, 2014

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Pitney Bowes Inc. (PBI) and its subsidiary, Pitney Bowes International Holdings, Inc. (PBIH) at 'BBB-'. The Rating Outlook has been revised to Stable from Negative. The Stable Outlook reflects the actions taken by Pitney Bowes to reduce debt and leverage and improve its operations. KEY RATING DRIVERS The ratings are supported by: the significant and entrenched market position in the core U.S. Mailing business; the necessity of mail equipment and services to conduct business across all industries; the diversity of the company's customer base, from both an industry and size perspective. PBI has stated its commitment to investment grade metrics, although these metrics and their levels have not been defined. Fitch believes that the actions taken in 2013 demonstrate that PBI is committed to maintaining investment grade ratings. These actions include the reduction in its quarterly dividend from $0.375 to $0.1875 per share, a 50 percent reduction, resulting in a saving of approximately $150 million per year. In addition, the company used proceeds from the sale of its Management Services business to redeem its $300 million in senior notes due in 2014. Over the last two years, PBI has reduced its total debt from $4.5 billion in 2011 to $3.6 billion at the end of 2013 (totals include PBIH's preferred security). Fitch calculated unadjusted gross leverage has declined from 4.7x in 2011 to approximately 4.3x (leverage metrics for both periods are pro forma for operating divestures), and core leverage has declined a full turn over the same period. Fitch expects 2014 year-end total leverage to remain at 4.3x. Fitch is not expecting material acquisition or share buyback activity, and there is limited room within the ratings for any share buyback activity. Any debt-funded share buyback activity or a material debt funded acquisition would be outside of current ratings. Fitch continues to be concerned with the continued revenue declines. Enterprise business ended the 2013 year up 3.5 percent and digital commerce solutions was up 3.1 percent. However, these gains were unable to fully offset the declines in the North American small- and medium-sized businesses, which was down 5.3 percent. Total revenue for 2013 was down 1.3 percent. Fitch notes that in the last three quarters, PBI has delivered positive year-over-year revenue growth in equipment sales. Continued positive growth in equipment sales could lead to improved financing, rental and supply revenues. PBI has provided revenue guidance of down 1 percent to up 2 percent, on a constant currency basis; Fitch believes this is achievable. There is limited room in the ratings for PBI to fall short on these revenue expectations. Ratings concerns include the secular and cyclical pressures inherent to the business and top-line declines. The ratings also consider event risk, faced by bondholders of all companies faced with secular challenges and underperforming equity, of a potentially more aggressive financial policy and capital structure. Fitch believes cyclical pressures accelerate the well-documented secular challenges, as customers could look to digital mailing as a cost-reduction mechanism, and choose to keep existing equipment. The acceleration of digital substitution for physical transaction mail results in reduced need for PBI's mailing equipment. Although the majority of PBI's revenue is not directly tied to mail volume, Fitch believes continued mail volume declines could drive reduced equipment needs, whether in terms of size, number or functionality. PBI's initiatives to position itself more as a digital and services company could gain traction. That said, in the near term, these initiatives will be challenged in offsetting the declines in the high-margin North American mailing space. These products could cannibalize existing physical business, but Fitch believes such a strategy is unavoidable, given ongoing digital substitution. Liquidity Pitney Bowes' liquidity position at Dec. 31, 2013 was solid, consisting of: $908 million of cash; and an undrawn $1 billion revolving credit facility maturing in April 2016 , which backstops the company's $1 billion commercial paper program. Liquidity is further supported by the company's annual free cash flow (FCF) generation. Fitch calculates estimates 2013 FCF at approximately $300 million . Fitch's current base case projections estimate annual FCF at $200 million-$250 million for the next few years. Fitch's FCF calculation deducts Pitney Bowes common and preferred dividend payments and does not add back cash flows associated with restructuring payments, and tax payments related to sales of leveraged lease assets. Pitney Bowes faces material annual maturities over the next several years. However, Fitch recognizes that the company can address a significant portion of its maturities organically with its pre-dividend FCF generation. As of Dec. 31, 2013 , Pitney Bowes' total debt was $3.6 billion . Fitch estimates that this consists of: -- $3.1 billion of senior unsecured debt, maturing between 2015- 2022 ( $2.2 billion ), one maturing in 2037 ( $500 million ) and one maturing in 2043 ( $425 million ); -- $230 million in term loans due in 2015/2016; -- $300 million of variable-term voting preferred stock in the company's subsidiary, PBIH. Under Fitch's hybrid security criteria, Fitch assigns 0 percent equity credit given the less than five-year maturity (based on the October 2016 call date). RATING SENSITIVITIES Positive: Given the secular challenges facing the company, Fitch does not expect positive rating momentum in the near term. Sustainable revenue growth driven by the company's various product initiatives coupled with a commitment to continue reducing absolute levels of debt may drive positive rating momentum. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Lack of traction in the company's digital initiatives and other growth businesses amid ongoing declines in the traditional physical business. Also, sustained revenue declines in the mid- to high- single-digits would pressure the ratings; --A sustained increase in total leverage from current levels, whether the result of incremental debt or lower EBITDA; --Indications of a more aggressive financial policy. Fitch has affirmed the following ratings: Pitney Bowes --IDR at 'BBB-'; --Senior unsecured revolving credit facility at 'BBB-'; --Senior unsecured term loan at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Short-term IDR at 'F3'; --Commercial paper at 'F3'. PBIH --Long-term IDR at 'BBB-'; --Preferred stock at 'BB'. The Outlook has been revised to Stable from Negative. Additional information is available at 'fitchratings.com '. Applicable Criteria & Related Research : --'Corporate Rating Methodology' Aug. 5, 2013 ; --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' Dec. 23, 2013 . Applicable Criteria and Related Research : Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=726863 Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=715139 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=818914 ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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