OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and senior unsecured debt ratings of The Western Union Company (Western Union) at 'BBB+' and the Short-Term IDR at 'F2'. The Rating Outlook is Stable. See the full list of ratings at the end of this release.

KEY RATING DRIVERS

Strong Competitive Position: Fitch believes Western Union operates from a strong competitive position, particularly with regard to the receiving end of its traditional cash-based remittance business. While there is some encroachment on the money transfer business in the developed economies from mobile and digital platforms, Western Union is investing in these platforms as well, and expanding markets where it can make account-based deposits. Western Union is strongly positioned as the largest provider with an extensive domestic and international agent base. The company is the largest operator in a fragmented market, with more than 500,000 agents located in 200 countries and territories. The company has an approximate 15% share in the global remittance business, with its next largest competitor having approximately one-fourth the revenues of Western Union.

Consumer-to-Consumer Segment: With approximately 79% of consolidated revenues, this segment is Western Union's core business. At times, the company has experienced greater price competition in the domestic money transfer business related to higher principal amounts, and at times may take targeted pricing actions where competitors have been active. For the past couple of years, pricing pressures have not been as significant as in 2013. On an overall basis revenues grew 3% in 2015 on a constant currency basis, the same as 2014. Volume growth in 2015 decelerated to 3% from 5% in 2014. In 2013, revenues on a constant currency basis declined 3% on 5% volume growth.

New Payment Technologies: New payment technologies are challenging Western Union's business in developed markets but are having a slower impact on the traditional remittance services to developing countries. The company is directing resources to compete in these areas, and has been expanding the forms of remittance through digital and mobile platforms as technology advances and as consumers adopt such platforms. For example, the company offers Apple Pay as a means of funding global transfers in some markets and domestic bill payments.

Foreign Currency Exposure: Given the broad diversification of the company's revenue, foreign currency exposure is significant. The company's greatest exposure is with settlements and this is largely eliminated by forward contracts, and also by the fact that the majority of money transfer transactions are paid the next day and agent settlements occur within a few days in most instances. The company also hedges revenue to provide cash flow predictability. The hedges only partly offset the revenue impact but have a much greater offsetting impact to profits. Additionally, there are natural hedges in the cost structure (commissions paid in local currencies) that protect the company's profitability as a percentage of revenue.

Compliance Costs: Compliance costs have risen over the past several years, from approximately $60 million in 2011 to about $200 million in 2015. These costs are largely unavoidable. Some compliance costs may be fixed, which may prove to be an advantage for Western Union, given its scale. To partly offset compliance cost increases, the company has been controlling costs by shifting certain operations from higher cost areas to lower cost areas.

Leverage Expectations: Fitch expects leverage to be approximately 2.3x and 2.2x at year-end 2016 and 2017, respectively. At the current 'BBB+' rating the company has moderate financial flexibility.

FCF: Western Union generates solid FCF (cash from operations less capex and dividends), and Fitch expects FCF to decline to a range of $400 million to $450 million in 2016 from $488 million in 2015. Fitch expects a modest rise in technology-related capital spending to just under $300 million, and there is the potential for a $100 million tax settlement, which may fall partly or entirely in 2016.

Capital Allocation: In February 2016, the company raised its dividend 3.2% (well below the 24% increase the prior year). As of March 31, 2016, the company had $472 million remaining on its $1.2 billion common share repurchase program authorized in February 2015 (effective through December 2017). In 2015, Western Union returned $817 million to shareholders.

KEY ASSUMPTIONS

--Relatively flat revenue growth in 2016 and 2% for 2017. Western Union experienced constant currency revenue growth of 4% in both 2014 and 2015, and Fitch assumes a similar level in 2016. Constant currency revenue declined (1%) in 2013 when aggressive pricing actions were taken.

--The remaining payment of approximately $100 million on a settlement with the IRS is included. The company has paid approximately $94 million of the $190 million settlement.

--The EBITDA margin declines modestly in 2016, and Fitch assumes is rises slightly in 2017 and beyond.

--Capital spending reflects additional amounts in 2016 for technology-related spending, and declines to a normal level of 4% of revenue thereafter.

--Compliance costs range 3.5% to 4.0% in the forecast.

RATING SENSITIVITIES

Positive Rating Action: Potential positive ratings drivers include a sustained rebound in EBITDA margins coupled with high single-digit revenue growth over several years, combined with leverage of approximately 2.0x.

Negative Rating Action: Potential rating drivers that could negatively impact the rating include the potential for Western Union to increase leverage above 2.5x to fund future acquisitions or shareholder-friendly actions. In addition, the ratings could be downgraded if EBITDA profit margins decline further from additional pricing pressures, which would suggest a more significant and prolonged competitive challenge than is currently factored into the ratings.

LIQUIDITY

Strong Liquidity Profile: Liquidity as of March 31, 2016 was bolstered by cash balances of $1.16 billion and availability on its $1.65 billion senior unsecured revolving credit facility. Approximately $750 million was held by foreign entities at March 31, 2016, down from $950 million at the end of 2015. Repatriating foreign earnings would have tax consequences in many instances. Offshore cash has been used to fund acquisitions outside the U. S. and to provide initial funding of principal transactions under C2C and Business Solutions transactions. The credit facility supports Western Union's $1.5 billion commercial paper program. The revolving facility expires in September 2020. Further support to liquidity is provided by FCF, which over the LTM ending March 31, 2016 was $481 million.

As of March 31, 2016, debt totalled $3.2 billion consisting principally of senior unsecured notes: $1 billion at 5.93% due October 2016; $500 million at 2.875% due December 2017; $400 million at 3.65% due August 2018, $250 million at 3.35% due May 2019; $325 million at 5.253% due April 2020; $500 million at 6.2% due November 2036; and $250 million at 6.2% due June 2040.

The company has a $575 million senior unsecured delayed-draw term loan in place to refinance a portion of the $1 billion due in October 2016.

Fitch has affirmed the following ratings, with a Stable Outlook:

The Western Union Company

--Long-Term IDR at 'BBB+';

--Senior unsecured at 'BBB+';

--$1.65 billion senior unsecured credit facility at 'BBB+';

--Short-Term IDR at 'F2';

--Commercial paper program at 'F2'.