S&P Downgrades Neustar (NSR) to 'BB-'; Retention of LNPA Contract Unlikely

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Sterling, Va.-based Neustar Inc. (NYSE: NSR) to 'BB-' from 'BB'. The rating remains on CreditWatch with negative implications.

At the same time, we lowered the issue-level rating on the company's senior secured debt to 'BB+' from 'BBB-'. The recovery rating on this debt remains '1', which indicates our expectation for "very high" recovery (90% to 100%; high end of range) for senior secured lenders in the event of payment default.

We also lowered the issue-level rating on Neustar's senior unsecured debt to 'B+' from 'BB-'. The recovery rating on this debt remains '5', which indicates our expectation for "modest" recovery (10% to 30%; low end of range) for debtholders in the event of default.

"The downgrade reflects our view that the likelihood that Neustar will retain the LNPA contract has diminished," said Standard & Poor's credit analyst Christopher Thompson.

We originally placed the ratings on CreditWatch on June 12, 2014 following the North American Numbering Council's recommendation to the FCC that the contract be awarded to rival bidder Telcordia, a unit of Sweden's telecommunications equipment supplier Ericsson. Since that time, the FCC's internal Wireline Competition Bureau has circulated a draft order to the full commission that, if adopted, would terminate Neustar's current contract and initiate new contract negotiations with Telcordia. Although the final outcome is still pending an official ruling by the FCC, the latest draft order by the bureau does not bode well for Neustar, whose current contract expires in June 2015, and could have a material adverse effect on the company since the contract accounts for about half of its revenue, providing it with a stable and predictable revenue stream.

While the contract is set to expire in June 2015, we believe that any potential transition to Telcordia could take longer given the scope of the conversion and the importance of ensuring that consumers are able to keep their phone numbers when switching carriers.

We are revising our business risk assessment on Neustar to "weak" from "fair" given the increased likelihood that the company will lose the contract. Similarly, we have revised our liquidity assessment on the company to "adequate" from "strong" given the heightened risk of a substantial impairment to cash flow generation.

We believe that potential loss of the contract will result in leverage rising to more than 3.5x from 1.4x due to substantially lower EBITDA. Under such a scenario, financial policy would be a key ratings factor, including Neustar's ongoing level of share repurchases and longer-term refinancing risk.

We plan to resolve the CreditWatch once the ultimate vendor is definitively selected and when we have greater clarity on the company's financial policy and longer-term credit metrics.

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