OREANDA-NEWS. IHS Inc.'s (IHS) 'BBB' long-term Issuer Default Rating (IDR) is unaffected by the company's recent acquisition announcements, according to Fitch Ratings.

Fitch views IHS's $650 million acquisition of Oil Price Information Service (OPIS) positively as it represents a new market within IHS's Resources vertical. OPIS's focus on the downstream portion of the Energy value chain provides IHS an entry into a segment that is less affected by low oil prices. In addition, OPIS provides the potential for new product offerings and revenue enhancement opportunities for IHS's existing Energy businesses. OPIS is a leading source of U.S. refined petroleum pricing information, news and analytics. It has the primary spot price benchmarks for several downstream products and maintains the most comprehensive database of U.S. wholesale petroleum prices. The company's subscription-based offerings are provided to approximately 7,000 customers across the energy supply chain and are used within commercial contracts and to settle trades.

The purchase price represents a 17.0x multiple of expected fiscal year ended (FYE) Dec. 31, 2016 EBITDA of $38 million. The acquisition multiple excludes approximately $150 million of tax benefits, which would reduce the multiple to 13.0x. The acquisition will be funded with bank debt.

Fitch believes the CDN$650 million (US$460 million) acquisition of CARPROOF Corporation (CARPROOF) will benefit IHS's operating profile given CARPROOF's consistent historical mid-teen organic revenue growth, highly subscription-based recurring revenue stream, Adjusted EBITDA margins of approximately 40%, leading Canadian market share, and expected continued growth prospects. Fitch also believes the acquisition provides IHS the ability to further scale its existing CARFAX business through product and revenue enhancements across both businesses.

IHS announced that it had acquired CARPROOF on Dec. 28, 2015. CARPROOF, founded in 2000, is a Canada-based company offering automotive vehicle history reports to dealers, auto auctions, OEMs, lenders, insurers, governments, law enforcement agencies and consumers. The purchase price represents a 16.0x multiple of expected FYE Dec. 31, 2016 EBITDA of CDN$41 million. The acquisition was funded with a mix of international cash on hand and revolver borrowings.

Although pro forma total leverage of 3.9x exceeds IHS's stated total leverage target of between 2.0x to 3.0x and the agency's expectations for the rating, Fitch expects IHS will reduce debt and return total leverage to within its stated target within the next 18-24 months for several reasons. IHS has exhibited a consistent track record of levering up for acquisitions following which it uses its free cash flow (FCF) to delever to its leverage target. The company continues to generate significant amounts of FCF, which will be used to repay debt. (The amount of FCF available for debt repayment will be enhanced with the announced pause in share buybacks.) Finally, IHS plans to use asset sale proceeds to further reduce outstanding debt.

Importantly, IHS restated its commitment to that target and will work to return total leverage to that range within the next 12-18 months using a combination of sources. First, the company will use FCF for debt repayment. Second, they announced a pause in share repurchase activity until leverage is closer to the top end of the company's target. And third, they plan to use proceeds from planned asset divestures (discussed below) to repay additional debt.

IHS recently announced plans to sell its Operational Excellence and Risk Management (OERM) and GlobalSpec businesses. This decision was reached following a portfolio evaluation to help the company narrow its focus around core information and analytic assets. OERM was primarily enterprise software based and GlobalSpec had a heavy reliance on advertising. Fitch expects IHS to complete these divestitures during the first half of 2016. Fitch views the divestures positively as they are not central to IHS growth plans and proceeds are to be used to repay debt associated with the announced acquisitions.

IHS's ratings are supported by the company's significant FCF generation, which affords the company meaningful financial flexibility and de-leveraging capacity. For FYE Nov. 30, 2015, FCF amounted to approximately $490 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%.

Overall, IHS's 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 its $1.3 billion revolver. Commitments under the revolver are set to expire during July 2019. Balance sheet cash totaled approximately $293 million as of Nov. 30, 2015, of which a significant portion is held in foreign subsidiaries.

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

RATING SENSITIVITIES

Positive Rating Action: Although Fitch does not foresee a positive rating action at this time given the increased leverage associated with the acquisitions, a positive rating action would likely coincide with:

--IHS publically adopting 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 Triggers:
--Material acquisitions that increase leverage over 4x without the expectation of deleveraging below 3x within 18 months would pressure the ratings.
--Shareholder-friendly actions that drive leverage over 3.5x and/or a weakening of IHS's operating profile as signalled by a persistent decline in the company's FCF/gross debt metric approaching 10%, deteriorating operating margins and revenue growth erosion also might trigger a downgrade.

Fitch currently rates IHS as follows:

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