Fitch Downgrades Pitney Bowes to ‘BBB+’; Outlook Remains Negative

<p><location value="LU/us.ny.nyc" idsrc="xmltag.org">NEW YORK</location>--(BUSINESS WIRE)-- Fitch Ratings has downgraded the following ratings of Pitney Bowes Inc. (Pitney Bowes) and its subsidiary, <org value="ACORN:530311219" idsrc="xmltag.org">Pitney Bowes International Holdings, Inc.</org> (PBIH): </p><p> Pitney Bowes </p><p> --Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-'; </p><p> --Senior unsecured revolving credit facility (RCF) to 'BBB+' from 'A-'; </p><p> --Senior unsecured term loan to 'BBB+' from 'A-'; </p><p> --Senior unsecured notes to 'BBB+' from 'A-'. </p><p> PBIH </p><p> --Long-term IDR to 'BBB+' from 'A-'; </p><p> --Preferred stock to 'BBB-' from 'BBB'. </p><p> Fitch has affirmed the following ratings of Pitney Bowes: </p><p> --Short-term IDR at 'F2'; </p><p> --Commercial paper (CP) at 'F2'. </p><p> The Rating Outlook on all ratings is Negative. </p><p> The downgrade is based on Fitch's view that the secular challenges facing Pitney Bowes are more severe than previously considered, given the continued operating weakness experienced in recent quarters. Revenue continues to decline in the low single digits and has not recovered in Fitch's expected timeframe. Fitch acknowledges that financing and rental revenue, which lag equipment sales and remain pressured due to prior year declines, continue to impede overall growth; however, equipment sales, particularly in the small and medium business (SMB) space, have not demonstrated a sustained recovery. Fitch believes this weakness is more attributed to secular challenges. Fitch believes that the acceleration of digital substitution for physical transaction mail results in reduced need for the company's mailing equipment. Although the majority of Pitney Bowes' revenue is not directly tied to mail volume, continued mail volume declines drive reduced equipment needs-whether size, number or functionality. Further, Fitch believes the cyclical pressures experienced during the downturn accelerated these cyclical pressures, as customers looked to digital mailing as a cost reduction mechanism, and lower financial and housing-related mail volumes are likely permanent. </p><p> Fitch estimates that total leverage has remained at or near 4.0 times (x) for the last several quarters. In addition, given the ongoing decline of finance receivables, more debt is attributed to the core, rather than the financing operations, resulting in an outsized increase in core leverage. The 'BBB+' rating incorporates Fitch's expectations that total leverage will remain below 4.0x. </p><p> The ratings incorporate Fitch's expectations that Pitney Bowes' initiatives to position itself more as a digital and services company are likely to gain traction and generate increasing revenue and free cash flow (FCF) in the coming years. The services and software businesses, which the company built out over the previous decade, face cyclical challenges but should grow amid a stable backdrop. New products that focus on secure digital mail delivery and web-based mailing and marketing are likely to gain traction with Pitney Bowes' customers and consumers given accelerating digital substitution. Fitch sees a potential of these products cannibalizing existing physical business but believes such a strategy is unavoidable given ongoing digital substitution. </p><p> The ratings reflect Fitch's view that Pitney Bowes will maintain a conservative financial profile over the near to intermediate term, and that any <org value="ACORN:1257629992" idsrc="xmltag.org">M</org>&A or share buyback activity will be funded with free cash flow. At the same time, the ratings also consider the risk, which is faced by bondholders of all companies with challenged organic growth and underperforming equity, of a potentially more aggressive financial policy and capital structure. Any such debt-funded activity would be outside of current ratings. </p><p> The ratings incorporate Fitch's expectations that the <org>U.S. Postal Service</org> (USPS) will remain a going concern. Under the assumption that the post office remains a viable entity, Fitch believes that a reduced delivery schedule and fewer post offices could benefit Pitney Bowes' Mailing Services and retail kiosk businesses. </p><p> The Negative Outlook reflects the increased threat of further macroeconomic pressures. Fitch believes there is room in the ratings for the company to withstand moderate economic pressures in 2011-2012. That said, the ratings do not incorporate declines similar to the levels seen in 2009. Given Fitch's view that cyclical pressures accelerate the secular pressures, a significant amount of cyclical weakness could be outside of current ratings. The Negative Outlook also reflects the uncertainty around whether Pitney Bowes' digital transformation initiatives will generate revenue and EBITDA enough to offset the declines in the high-margin North American Mailing space. Although Fitch is fairly optimistic on these initiatives, it remains to be seen what their adoption rate, margin profile, and FCF generating capabilities will be. While Pitney Bowes' existing relationships with large corporate mailers is a competitive advantage, there are much greater competitive pressures in these businesses than in the company's core North American Mailing business. </p><p> Pitney Bowes' ratings are supported by: </p><p> --The significant and entrenched market position in the core U.S. Mailing business, characterized by approximately 80% share of the postage meter market and limited competitive pressures. </p><p> --The necessity of mail equipment and services to conduct business across all industries. </p><p> --The high degree of recurring revenue, as more than 70% of the total revenue base is contractual, of which only 20% is volume-based. </p><p> --The diversity of the company's customer base, from both an industry and size perspective. </p><p> --The company's strong credit risk management policies regarding its financial services business. </p><p> Ratings concerns center on: </p><p> --Fitch's belief that the highly profitable North American Mailing business, which accounted for 38% of revenue and 65% of operating profit in the latest 12 months ended <chron>June 30, 2011</chron>, will remain challenged to grow organically. Fitch believes that continued low single-digit declines in U.S. mail volume will reduce demand for equipment and supplies required by customers over the longer-term. Mail volume declines are expected to be driven by increased electronic substitution of physical mail for bills and statements, as well as the likely permanent nature of some of the reductions in mail that occurred during the downturn, particularly in the financial services and other mail-intensive industries. </p><p> --The risk of moderate pressure in overall profitability as Pitney Bowes continues to invest in its lower-margin services, software, international, and production mail businesses to grow its top line and offset declines in the core U.S. Mailing business. The company's ongoing restructuring initiatives are expected to partially offset some of these pressures. </p><p> --Given the limited organic growth profile, Fitch believes that the company could begin to pursue a more aggressive financial policy over the longer term. However, any efforts to augment growth rates with debt-financed acquisitions are not embedded into the current ratings. </p><p> A downgrade could result should the following occur: </p><p> --A sustained increase in total leverage above 4.0x, whether the result of incremental debt or lower EBITDA. </p><p> --An acceleration of declines in the core SMB space (particularly in equipment and supplies), due to cyclical weakness. Given Fitch's view that cyclical weakness intensifies secular pressures/digital substitution, this would likely result in longer-term challenges even amid any subsequent macroeconomic recovery. Such declines could encourage Fitch to further tighten its leverage targets in a given ratings category. </p><p> --Lack of traction in the company's digital initiatives and other growth businesses, or indications that they will not be enough to offset the declines in the traditional physical business. </p><p> --Indications of a more aggressive financial policy. </p><p> The ratings could be stabilized should the following occur: </p><p> --Demonstration of sustainable organic growth in the company's overall revenue base. Fitch believes that this will likely be driven by the Mailing Services, Production Mail, or Software businesses, rather than the core North American Mailing business. </p><p> --Indications over the next one to two years that a successful roll-out of the digital and customer communications initiatives, in combination with growth in its mail services businesses, will offset declines in its physical business. </p><p> --An explicit commitment by the company to conduct financial policy within Fitch's expectations for a 'BBB+' rating, including leverage below 4.0x, no debt funded acquisitions/share buybacks, and repayment of its 2012 maturity with cash. </p><p> Pitney Bowes' liquidity position at <chron>June 30, 2011</chron> was solid, consisting of: i) <money>$578 million</money> of cash, including <money>$102 million</money> of deposits at <org value="ACORN:2076513670" idsrc="xmltag.org">Pitney Bowes Bank</org>, that is unavailable for corporate use; ii) an undrawn <money>$1.25 billion</money> RCF maturing in <chron>May 2013</chron>, which backstops the company's <money>$1.25 billion</money> CP program. Liquidity is further supported by the company's stable annual free cash flow generation, which Fitch estimates will approximate <money>$350 million-$450 million</money> for the next few years, before pension funding obligations or any future cash restructuring payments. Fitch estimates that Pitney Bowes could repay its <chron>October 2012</chron> maturity with cash and free cash flow if it chose, it is uncertain how the company will choose to handle this maturity. </p><p> As of <chron>June 30, 2011</chron>, Pitney Bowes' total debt was <money>$4.5 billion</money>, consisting of i) <money>$400 million</money> senior unsecured notes maturing <chron>October 2012</chron>; ii) <money>$150 million</money> unsecured term loan maturing <chron>December 2012</chron>; iv) <money>$3.6 billion</money> of senior unsecured debt, consisting of eight notes maturing between 2013-2019 and one maturing in 2037; and v) <money>$300 million</money> of variable term voting preferred stock in the company's subsidiary, PBIH. Fitch has lowered the amount of equity credit it assigns to these securities, to 0% from 25% previously. Based on Fitch's updated hybrid criteria (dated <chron>July 11, 2011</chron>), these securities would receive 0% based on the five-year maturity (based on the <chron>October 2016</chron> call date). </p><p> Additional information is available at '<a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com&esheet=6854940&lan=en-US&anchor=www.fitchratings.com&index=1&md5=beb24810c7c03122057516f428646ddf">www.fitchratings.com</a>'. </p><p><org>Applicable Criteria & Related Research</org>: </p><p> --'Corporate Rating Methodology' <chron>Aug. 12, 2011</chron>; </p><p> --'Evaluating Corporate Governance' <chron>Dec. 16, 2010</chron>; </p><p> --'Short-Term Ratings Criteria for Corporate Finance' <chron>Aug. 12, 2011</chron>; </p><p> --'Parent and Subsidiary Ratings Linkage' <chron>Aug. 12, 2011</chron>; </p><p> --'Treatment of Hybrids in Corporate and REIT Credit Analysis' <chron>July 11, 2011</chron>; </p><p> --'Analysis of U.S. Corporate Pensions' <chron>Dec. 1, 2010</chron>. </p><p><org>Applicable Criteria and Related Research</org>: </p><p> Corporate Rating Methodology </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D647229&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D647229&index=2&md5=42b57802dd0ea29ed121868601137fad">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229</a></p><p> Evaluating Corporate Governance </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D581405&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D581405&index=3&md5=19b37709bb5a3ce6d53e3e828e4c3d52">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405</a></p><p> Short-Term Ratings Criteria for Corporate Finance </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D568726&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D568726&index=4&md5=6e5ab89785695be5e7dae44d34166ad7">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726</a></p><p> Parent and Subsidiary Rating Linkage </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D647210&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D647210&index=5&md5=32b538827634f264e1357a84c893c060">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210</a></p><p> Treatment of Hybrids in Corporate and REIT Credit Analysis </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D642132&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D642132&index=6&md5=6c794fff111c9ab2660d36fa620c83c6">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132</a></p><p> Analysis of U.S. Corporate Pensions </p><p><a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D578365&esheet=6854940&lan=en-US&anchor=http%3A%2F%2Fwww.fitchratings.com%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D578365&index=7&md5=d1a4bde74bf0cf6c4dfe469ea1ba7504">http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365</a></p><p> ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: <a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=HTTP%3A%2F%2FFITCHRATINGS.COM%2FUNDERSTANDINGCREDITRATINGS&esheet=6854940&lan=en-US&anchor=HTTP%3A%2F%2FFITCHRATINGS.COM%2FUNDERSTANDINGCREDITRATINGS&index=8&md5=a0bf144855150d61b0dedae5f7a45579">HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS</a>. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '<a href="http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2FWWW.FITCHRATINGS.COM&esheet=6854940&lan=en-US&anchor=WWW.FITCHRATINGS.COM&index=9&md5=a307938ae88b838be7cb16f7e95fe71b">WWW.FITCHRATINGS.COM</a>'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. </p><p><img alt="" src="http://cts.businesswire.com/ct/CT?id=bwnews&sty=20110908006482r1&sid=acqr4&distro=nx" /><span class="bwct31415" /></p><p> Fitch Ratings<br />Corporates:<br />Primary Analyst<br /><person>Melissa Link-Cohen</person>, CFA, +1-212-908-0611<br />Director<br /><org value="ACORN:1942178792" idsrc="xmltag.org">Fitch, Inc.</org><br /><location>One State Street Plaza</location><br /><location value="LU/us.ny.nyc" idsrc="xmltag.org">New York, New York</location> 1000<br />or<br />Secondary Analyst<br /><person>Rolando Larrondo</person>, +1-212-908-9189<br />Director<br />or<br />Financial Institutions:<br />&lt;person>Sadia Nabi</person>, +1-212-908-0327<br />Associate Director<br />or<br />Committee Chairperson<br /><person>Sean Sexton</person>, CFA, +1-312-368-3130<br />Managing Director<br />or<br />Media Relations:<br /><person>Brian Bertsch</person>, +1-212-908-0549 (<location value="LU/us.ny.nyc" idsrc="xmltag.org">New York</location>)<br /><a href="mailto:[email protected]">[email protected]</a></p><p></p><p>Source: Fitch Ratings</p>