OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Thomson Reuters Corporation's (TRI) proposed issuance of $500 million of senior unsecured notes due 2026. Net offering proceeds are to be used to repay $500 million of existing 0.875% senior unsecured notes maturing in May 2016.

KEY RATING DRIVERS

The ratings reflect TRI's cash flow-generating ability, geographic and product diversification, sound balance sheet, and consistent and conservative financial policies. Fitch expects the company will continue to target 2.5x net unadjusted leverage. As of Mar. 31, 2016, Fitch calculates gross leverage of 2.7x and net leverage of 2.5x.

Fitch recognizes that TRI's core businesses possess meaningful barriers to entry and that there are a limited number of well-capitalized competitors that can compete predominantly on product differentiation, quality and delivery.

Recurring, subscription-based revenues accounted for approximately 87% of TRI's consolidated revenues at year-end 2015 and provide significant visibility, stability and predictability to the company's free cash flow (FCF) generation. The subscription-based business model capitalizes on long-standing client relationships and improving account churn. Fitch expects net sales within the company's Financial and Risk (F&R) segment will continue to improve and does not expect any material deviation from its well-established revenue mix.

Rating concerns include the cyclicality of the F&R segment, TRI's largest. For the three months ended Mar. 31, 2016, the segment's revenue was down 3%, but down only 1% on a constant currency and organic basis. TRI's overall revenue/product diversification creates a cushion to absorb specific segment pressures, and consolidated revenues were down only 1% through Mar. 31, 2106 but up 1% on a constant currency and organic basis. For FY 2015, F&R segment revenue was flat on a constant currency and organic basis, while consolidated revenues grew 2%.

Fitch expects EBITDA margins to continue to be susceptible to future downturns. The F&R segment generally exhibited less operating leverage (on an EBITDA basis) in the last downturn than Fitch would have anticipated. Conversely, EBITDA margins would be expected to rebound meaningfully upon the return of revenue growth.

TRI has been focusing on reducing costs through product and platform simplification to increase its operating leverage, thereby strengthening EBITDA margins. As a result of these efforts, the company remains on track to realize $400 million of annual run-rate savings by 2017, primarily in the F&R segment.

Fitch believes management will continue to be disciplined in its approach to acquisitions and divestitures. TRI has reduced its focus on growth through acquisitions, focusing instead on organic growth, and Fitch expects future acquisitions to be smaller tactical deals.

Regarding divestitures, in February 2016 TRI announced it had launched the sale process for its Intellectual Property & Science (IPS) business, with a closing expected in the second half of 2016. IPS comprised approximately 8% of TRI's FY 2015 total revenues and 9.2% of EBITDA. Fitch expects TRI will use a portion of net divestiture proceeds for debt repayment to allow the company to remain within its 2.5x net target leverage, with excess proceeds used to invest in core businesses and for share buybacks. Fitch believes TRI has completed most of its portfolio pruning and does not expect any additional material divestitures.

In February 2016, TRI also announced plans to repurchase up to an additional $1.5 billion of its common shares by the end of 2017. Since 2004, TRI has returned over $15 billion to shareholders through dividends and share repurchases. Fitch expects TRI to issue debt to return capital to its shareholders but to remain within its stated 2.5x net leverage target.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for TRI include:
--Low-single-digit underlying growth beginning 2016.
--Continued margin improvements resulting from restructuring efforts;
--Shareholder returns of $1 billion in buybacks and $1 billion in dividends annually with flexibility to moderate buybacks or acquisition spend.

RATING SENSITIVITIES
More Conservative Metrics for Upgrade: Rating upside is limited. However, an explicit commitment to and sustained track record of more conservative financial policy including maintaining gross leverage below 2x could merit upgrade consideration. In tandem with the adoption of a more conservative financial policy, Fitch would need to observe a stronger operating profile within the F&R segment as evidenced by sustained positive net sales and segment operating margins approaching 30%.

Downgrade Trigger: Fitch believes TRI is committed to its balance-sheet parameters. However, a significant acquisition or increased shareholder-friendly initiatives that increase gross leverage as calculated by Fitch to over 3x, or greater than 2.5x on a net leverage basis.

LIQUIDITY

As of Mar. 31, 2016, TRI had $869 million in cash and cash equivalents. Liquidity is also supported by TRI's $2 billion commercial paper (CP) program. The CP program is supported by its undrawn $2.5 billion revolving credit facility that expires May 2018. Based on Fitch's calculations, LTM FCF after dividends as of Mar. 31, 2016 was $1,081 million (includes $34 million in cash adjustment related to restructuring).

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating

Thomson Reuters Corporation
--Senior unsecured notes 'BBB+'.

Fitch currently has the following ratings:

Thomson Reuters Corporation
--Issuer Default Rating (IDR) 'BBB+';
--Bank credit facility 'BBB+';
--Senior unsecured notes 'BBB+';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

The Rating Outlook is Stable.