OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Pitney Bowes Inc. (PBI) and its subsidiary, Pitney Bowes International Holdings, Inc. (PBIH) at 'BBB-'. The Rating Outlook remains Stable. The Stable Outlook reflects the actions taken by Pitney Bowes to reduce debt and leverage and improve its operations. A full list of ratings actions follows at the end of this release.

Fitch believes PBI is weakly positioned within the 'BBB-' rating category driven primarily by the continued secular headwinds facing the company while strategic initiatives to spur revenue growth and diversify the business struggle to gain traction. Top line declines driven by continued weakness in their core mailing business raises concerns about the sustainability of the current business model. Although the company has completed a significant amount of cost savings and has identified additional cost saving opportunities, they may be hard pressed to offset continued top line pressures and maintain margins. The recently instituted share buyback program may drain resources away from further debt repayment given that Fitch's growth expectations do not support the ability to do both. Finally, the current rating incorporates the belief that continued growth in the digital commerce solutions business will eventually offset declining business performance elsewhere.

Fitch believes the ongoing secular issues will challenge the company's ability to maintain a credit profile indicative of an investment grade rating. If these issues continue over the near-term, Fitch will likely reconsider the current 4.0x maximum total leverage threshold for the current rating, which would increase negative rating pressure.

Fitch views actions taken by the company to support the current rating as a positive, although PBI would need to continue these efforts. PBI has exhibited a willingness to address the secular headwinds by divesting underperforming assets and markets. The company has worked aggressively to reduce costs, resulting in an almost 200 basis point improvement in EBITDA margins since 2012. Finally, they have reduced debt by almost $1 billion during the same period, bringing total leverage below 4.0x at Dec. 31, 2015 for the first time in that period.

KEY RATING DRIVERS

The ratings are supported by PBI's significant and entrenched market position in the core U.S. Mailing business, the necessity of mail equipment and services to conduct business across all industries, and the diversity of the company's customer base, from both an industry and size perspective.

Although PBI has stated its commitment to investment grade metrics, they have not publicly defined metrics. Fitch believes that various actions taken over the last few years demonstrate PBI's commitment. PBI has reduced its total debt, including PBIH's preferred securities, from $4.5 billion in 2011 to $3.2 billion at the end of 2015. Unadjusted pro forma gross total leverage has declined from 4.7x in 2011 to approximately 4.0x and core leverage has gone from 4.3x at year-end (YE) 2011 to 3.2x. Fitch expects total leverage at Dec. 31, 2016 to be in approximately 3.8x.

The ratings incorporate the potential for moderate acquisition and share buyback activity, limited to FCF. To that end, PBI's board recently authorized an additional $150 million in share repurchases bringing the amount remaining for repurchase to approximately $160 million. Through Feb. 8, 2016, PBI has repurchased $54 million of common stock. Any debt-funded activity would be outside current ratings.

Despite the company's focus on IG ratings, Fitch acknowledges the risk faced by bondholders of all companies with challenged growth and underperforming equity of a potentially more aggressive financial policy. Fitch believes that share repurchases could be suspended if there is any material decline in PBI's operational profile.

Fitch continues to be concerned with overall top-line declines, driven by weakness in small and medium-sized businesses (SMBs) and a strong U.S. Dollar, although the declines have been moderating given the company's ongoing rationalization efforts. For FY2015, growth in PBI's digital commerce solutions offset declines in PBI's core mailing business on a constant currency basis, in line with Fitch expectations. However, the continued decline in equipment sales is a concern due to the impact on future financing, rental and supplies revenue. There is limited room in the ratings for PBI to fall short of its revenue guidance for FY 2016 of down 1% to up 2%.

Fitch believes secular pressures accelerate the well-documented secular challenges, as customers could look to digital mailing as a cost-reduction mechanism, and choose to keep existing equipment. The acceleration of digital substitution for physical transaction mail results in reduced need for PBI's mailing equipment. Although the majority of PBI's revenue is not directly tied to mail volume, Fitch believes continued mail volume declines will drive reduced equipment needs, whether in terms of size, number or functionality.

Fitch views PBI's initiatives to position itself more as a digital services company positively, and they continue to show traction. For FY 2015, Digital Commerce Solutions constituted 25% of total revenue, up from 15% in FY 2014. However, in the near term, these initiatives will be challenged to offset the declines in the high-margin North American mailing segment. While these initiatives could cannibalize existing physical business, Fitch believes such a strategy is unavoidable, given ongoing digital substitution.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
--flat to-low single digit top line improvement on a constant currency basis;
--Minimal margin improvement as a majority of the company's expected cost savings have been realized;
--No material change to stated dividend
--$200 million of share repurchases
--Majority of maturities are refinanced.

RATING SENSITIVITIES

Positive: Given the secular challenges facing the company, Fitch does not expect positive rating momentum in the near term. Sustainable revenue growth driven by the company's various product initiatives coupled with a commitment to continue reducing absolute levels of debt may drive positive rating momentum.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Lack of traction in the company's digital initiatives and other growth businesses amid ongoing declines in the traditional physical business;

--A sustained increase in total leverage exceeding 4.0x, whether the result of incremental debt or sustained revenue declines in the mid to high-single-digits that would pressure EBITDA;

--Indications of a more aggressive financial policy.

LIQUIDITY
PBI's liquidity position at Dec. 31, 2015 was solid, consisting of $300 million of cash on hand and an undrawn $1 billion revolving credit facility maturing in January 2020, which backstops the company's $1 billion commercial paper program. Liquidity is further supported by the company's annual FCF generation.

Fitch calculates FY 2015 FCF at $180 million. Fitch's current base case projections estimate annual FCF at $150 million-$250 million for the rating horizon. Fitch's FCF calculation deducts PBI's common and preferred dividend payments and does not add back cash flows associated with restructuring payments, and tax payments related to sales of leveraged lease assets. PBI faces material annual maturities over the next several years. However, Fitch recognizes that the company can address a significant portion of its maturities organically with its pre-dividend FCF generation and accessing the capital markets.

As of Dec. 31, 2015, PBI's total debt was $3.2 billion (pro forma for January maturity and new term loan).

Fitch estimates that this consists of:

--$2.3 billion of senior unsecured notes, maturing between 2017 - 2024 ($1.8 billion), one maturing in 2037 ($115 million) and one maturing in 2043 ($425 million);
--$450 million in term loans due in 2016/2020;
--$300 million of variable-term voting preferred stock in the company's subsidiary, PBIH. Under Fitch's hybrid security criteria, Fitch assigns 0% equity credit given the less than five-year maturity (based on the October 2016 call date).

FULL LIST OF RATING ACTIONS

Pitney Bowes
--IDR at 'BBB-';
--Senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loan at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.

PBIH
--Long-term IDR at 'BBB-';
--Preferred stock at 'BB'.

The Rating Outlook is Stable.