OREANDA-NEWS. IHS, Inc.'s (IHS) 'BBB' Issuer Default Rating (IDR) will not be affected by the company's \$500 million share buyback program, according to Fitch Ratings. The new program expires in Nov. 30, 2017, but may be suspended at any time at the company's discretion. The recently announced buyback plan follows the completion of \$100 million share buyback program announced during January 2015.

The current ratings have sufficient flexibility to accommodate the company's decision to initiate a more aggressive capital allocation policy and to operate at the higher end of its 2x to 3x leverage target. Fitch expects that IHS will generate adequate levels of free cash flow (FCF) to fund the share repurchase activity and does not expect IHS to increase leverage from the current level. Fitch believes that IHS will remain disciplined in providing shareholder returns within the context of the higher end of its stated target leverage of 2x to 3x. IHS's capital allocation strategy will remain focused on investments in its core business, and strategic M&A activities while maintaining a strong balance sheet. However, given the company's decision to operate at the higher end of its leverage target, Fitch notes that there is limited ratings flexibility for share repurchases beyond available FCF, operational shortfalls, or other material unexpected cash requirements, and expects IHS to moderate shareholder returns and to de-lever back to its target leverage in the event of a leveraging acquisition. In addition, Fitch expects IHS to remain rational with buybacks if headwinds within its energy vertical impacts FCF generation.

Leverage through the latest 12 months (LTM) period ended May 31, 2015, was 3.3x (Fitch adjusted) marking a significant improvement relative to 4.3x as of fiscal year-end Nov. 30, 2013. Fitch calculates the company's gross leverage by netting non-cash stock based compensation with cash share buy backs related to the company stock compensation program. All IHS employees participate in the company's stock comp program. In order to cover the employee's tax liabilities related to stock compensation awards, IHS allows employees to sell a dollar equivalent of shares to IHS to cover the tax liability. These share repurchases are discretionary. However, Fitch believes it is appropriate to net this cash outlay with the non-cash stock comp expense component.

Overall, the ratings reflect IHS' strong business profile, long-standing client relationships and core competencies, which leverage deep industry expertise and integrated service delivery platforms to provide data, analytics and research focusing on six global, capital intensive industries with highly connected supply chains: Energy & Natural Resources, Chemicals, Technology, Automotive, Aerospace & Defense and Maritime.

Fitch believes IHS' business model creates high barriers to entry associated with IHS' core businesses and that the capital needed and operational disruption to customers caused would make it challenging for competition to replace IHS.

Recurring, subscription-based revenues account for approximately 75% (2014) of IHS' consolidated revenues and provide significant visibility, stability and predictability to the company's free cash flow generation. The subscription based business model capitalizes on long-standing client relationships with nominal account churn. Fitch does not expect any material deviation from this well established revenue mix. Non-subscription revenues tend to be more volatile due to the timing of projects and the release of various products.

Fitch notes that revenues tend to be concentrated within the company's Energy and Natural Resources and Automotive industry verticals; however, Fitch acknowledges the improved revenue and customer diversity brought by IHS' acquisition of R.L. Polk & Company during 2013. Fitch points out that overall revenue generation is concentrated among IHS' largest clients as the top 1,000 clients generate approximately two-third of revenues.

The ratings are supported by IHS' significant FCF generation, which affords the company with meaningful financial flexibility and de-leveraging capacity. Through the LTM period ended May 31, 2015, FCF amounted to approximately \$455 million. Fitch expects EBITDA to FCF conversion to remain strong at around 65% over the ratings horizon driven by the low capital intensity nature of the business. Fitch anticipates 2015 capital expenditures will range between 5.5% and 5%. The company has made several investments in internal systems and external user interfaces.

FCF to adjusted debt metrics were 19.5%, 25.0% and 17.0% as of LTM May 2015, YE2014, and YE2013 respectively. The 2013 decline in this metric was driven by the increase in debt related to R.L. Polk.

Overall, IHS' financial flexibility and liquidity position are solid considering its ability to generate consistent levels of FCF. The company's liquidity position is further supported by available borrowing capacity under the company's new \$1.3 billion revolver. Commitments under the revolver are set to expire during July 2019. Balance sheet cash totaled approximately \$226 million as of May 31, 2015, of which a significant portion is held in foreign subsidiaries.

Fitch points out that approximately 20% of IHS revenues are transacted in foreign currencies. IHS' 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 market access to address near-term maturities. Near term scheduled maturities consist primarily of scheduled amortization from the company's term loans.

RATING SENSITIVITIES

What Could Trigger a Positive Rating Action:
--IHS publically adopting a more conservative financial policy highlighted by unadjusted gross leverage target of 2.5x or lower (under Fitch's calculation).
--Positive operating momentum as evidenced by expanding EBITDA and FCF margins, growing diversity of its customer base, strong organic revenue growth, may lead to positive rating actions.
--Maintenance of a free cash flow to gross debt metric greater than 15% will also be a key consideration.

What Could Trigger a Negative Rating Action:
--Likely driven by a materially large acquisition, or multiple acquisitions, that increases leverage (as calculated by Fitch) over 4x, without the expectation of leverage reducing below 3x within 18 months.
--Shareholder friendly actions that drive leverage over 3.5x would likely pressure ratings.
--Moreover a weakening of IHS' operating profile as signaled by a persistent decline in the company's free cash flow to gross debt metric to below 10%, deteriorating operating margins and revenue growth erosion brought on by increased customer churn, difficult economic conditions or competitive pressure will also be a key consideration.

Fitch currently rates FDC as follows:

--IDR 'BBB';
--Senior unsecured 'BBB'.