OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to IHS Markit Ltd.'s (IHS Markit) $750 million senior unsecured exchange notes due 2022.

Fitch assigned a 'BBB' Long-Term Issuer Default Rating (IDR) to IHS Markit following IHS, Inc.'s announcement that it would merge with Markit Ltd. In connection with the merger, IHS's existing credit facilities will be upsized (revolver increases to $1.85 billion and term loan remains at $1.2 billion) and migrated to Markit Group Holdings Limited (UK), where Markit's $500 million in private placement notes will continue to reside. Markit's existing revolver will be retired.

The migrated credit facilities, new senior unsecured exchange notes and existing private placement notes will comprise the entire capital structure. A full list of rating actions follows at the end of this release.

Fitch views the merger with Markit positively. Markit accelerates IHS's push into financial services, which IHS identified as a strategic initiative toward the end of 2015. Markit will provide direct access to the private equity, investment banking and institutional investor customers that IHS planned on targeting, and also add the know-how with regard to packaging solutions for financial services customers, an experienced financial services sales force, and additional cross-selling opportunities. The combined IHS Markit exposure to the resources space, which is being negatively affected by current low oil prices, will be approximately 27% of consolidated revenue compared to 40% for IHS standalone. This reduced exposure was further helped by IHS's Feb. 11, 2016 acquisition of Oil Prices Information Services (OPIS), which is less sensitive to oil & gas prices due to its downstream focus.

The merger provides a CEO succession plan, with Markit's current CEO set to become IHS Markit's CEO at the end of 2017. And finally, the merger represents a delevering event for IHS given its structure as an all-stock deal; following the merger, IHS's total leverage declines from 3.7x to 2.9x (pro forma for a full year of CARPROOF Corporation (Carproof) and OPIS, and assuming proceeds from recent divestitures are applied to debt repayment). Pro forma leverage is in line with IHS's pre-merger target of 2.0x-3.0x and Fitch's expectations for the current rating. IHS Markit has stated it will maintain this target leverage.

On March 21, 2016, IHS and Markit announced an all-stock merger of equals. The transaction values Markit at $6.2 billion including assumed debt, which represents a 12.2x multiple of Markit's fiscal year end (FYE) Dec. 31, 2015 Adjusted EBITDA of $497 million. IHS existing shareholders will own approximately 57% of the new company while Markit existing shareholders will own approximately 43%.

Markit provides pricing and reference data, indices, valuation and trading services, trade processing solutions, enterprise software, and managed services to financial market participants worldwide. Its primary focus is to help its customers manage risk, increase transparency and improve efficiency. The company services more than 3,500 institutional customers including banks, hedge funds, asset managers, regulators, exchanges, clearing houses and others from 13 locations. For its FYE Dec. 31, 2015, Markit generated $1.1 billion of revenues and $497 million of Adjusted EBITDA.

On a combined basis for their most recent respective last 12 months (LTM) reported periods, Fitch estimates that IHS and Markit generated approximately $3.3 billion in revenue, $1.2 billion in EBITDA, and $810 million in free cash flow (FCF). Following the merger, IHS Markit will provide products and services to more than 50,000 customers, including 75% of the Fortune Global 500, 35 of the 50 largest U. S. banks and 46 of the 50 largest global asset managers.

Management expects to realize $100 million of revenue synergies by year end 2019 driven mainly by cross-selling opportunities with additional upside possible from new product development. They have also uncovered $125 million of potential expense synergies driven primarily by reducing public company costs, optimizing facilities, and integrating corporate functions. Fitch believes the company will realize most of the synergies, especially the expense reductions given their nature and relative size. Regardless, synergies were excluded from Fitch's total leverage calculations.

KEY RATING DRIVERS

Must-Have Data: Fitch believes IHS Markit's data sets are critical to its customers' workflow and would be difficult to replicate. The company's databases contain thousands of data points sourced from governments, customers, technical publications and other sources, in some cases dating back to the 1800s. Certain data, such as oil well data, requires synthesis by engineers and geologists to make it usable for customers, adding an additional proprietary element to the asset.

Stable Business Model: Subscription-based revenues account for approximately 85% of IHS Markit's combined revenues and provide significant visibility, stability and predictability to the company's FCF generation. The subscription-based business model capitalizes on long-standing client relationships with nominal account churn. Built-in price escalators combined with strong retention provide a strong platform for organic growth without the need for significant new product sales.

Margin Expansion, FCF: Fitch expects EBITDA margins to expand to about 40% (from low 30's IHS standalone) over the rating horizon based on the addition of Markit's higher margin business (43.5% U. S. GAAP EBITDA margin in fiscal year 2015), scalability of data assets, and realization of $125 million in annual run-rate cost synergies. Fitch expects low capital intensity of about 6% to result in annual FCF in excess of $900 million over the rating horizon.

Financial Policy, Leverage: IHS's total leverage declines from 3.7x to 2.9x (pro forma for a full year of Carproof and OPIS, and assuming proceeds from recent divestitures are applied to debt repayment). Pro forma leverage is in line with IHS Markit's total leverage target of 2.0x-3.0x and Fitch's expectations for the current rating. The company plans to execute $1 billion of share buybacks in each of 2017 and 2018, funded through a combination of FCF and additional debt capacity created through EBITDA growth.

Highly Acquisitive: IHS and Markit have effected over 100 total acquisitions in their combined history. While Fitch expects the current merger to satiate their appetite for larger deals in the near term to allow for execution on synergies, smaller deals are likely to continue. Fitch expects larger transactions to resume in the intermediate term. The ratings allow for temporary increases above Fitch's 3.0x leverage sensitivity for M&A.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for IHS Markit include:

--Mid-single-digit organic revenue growth, with upside potential to high single digits from successful execution on cross-selling opportunities;

--EBITDA margin expands to about 40% (from low 30s IHS standalone) over the rating horizon based on addition of higher margin Markit business (43.5% EBITDA margin in fiscal year 2015) scalability of data assets, and realization of $125 million in annual run-rate cost synergies;

--Share buybacks of $1 billion in both 2017 and 2018;

--Annual FCF in excess of $900 million over the rating horizon;

--Likelihood of ongoing M&A, with potential for larger transactions to result in short-term gross unadjusted leverage above 3.0x.

RATING SENSITIVITIES

Positive Rating Action:

--A more conservative financial policy highlighted by an unadjusted gross leverage target of 2.5x or lower (under Fitch's calculation);

--Positive operating momentum coupled with growing diversity of its client base and/or maintenance of FCF/gross debt above 15%.

Negative Rating Action:

--Material acquisitions or shareholder-friendly actions that increase leverage over 3x without the expectation of deleveraging below that level within 18 months;

--A weakening of IHS Markit's operating profile after the merger, as signalled by a persistent decline in the company's FCF/gross debt metric approaching 10%, deteriorating operating margins and revenue growth erosion.

LIQUIDITY

IHS Markit's financial flexibility and liquidity position are solid based on Fitch's expectations for over $900 million of annual FCF over the rating horizon. The company's liquidity position is further supported by available borrowing capacity under the company's upsized $1.85 billion revolver ($1.2 billion drawn as of pro forma Q1 2016), which matures in 2021.

IHS Markit's maturity schedule is manageable and Fitch believes that the company has sufficient financial flexibility through expected FCF generation, available borrowing capacity from the revolver, and capital markets access to address near-term maturities. Near-term scheduled maturities are minimal and consist primarily of scheduled amortization from the company's term loans.

Pro forma total debt (excluding expected debt repayments from divestiture proceeds) as of Q1 2016 is $3.8 billion and consists of:

--$1.85 billion of senior unsecured revolving credit facility due 2021 ($1.2 billion drawn);

--$1.206 billion of senior unsecured term loan A due 2021;

--$750 million of 5.000% senior unsecured notes due 2022;

--$210 million of 3.73% senior unsecured private placement notes due 2022;

--$290 million of 4.05% senior unsecured private placement notes due 2025; and

--$120 million of capital leases and other debt

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

IHS Markit Ltd.

--Long-Term IDR 'BBB';

--Senior unsecured notes 'BBB'.

Additionally, Fitch has affirmed the following ratings:

Markit Group Holdings Limited (UK) (previously assigned to IHS, Inc.)

--Long-Term IDR 'BBB'.

Fitch withdrew the 'BBB' rating of the senior unsecured notes issued by IHS, Inc., which will be exchanged for the new senior unsecured notes at IHS Markit Ltd.

The Rating Outlook is Stable. The credit facilities and private placement notes are not rated.