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S&P Lowers Outlook on MoneyGram (MGI) to Negative; Cites Wal-mart's New Money-Transfer Service

April 21, 2014 2:51 PM EDT

Standard & Poor's Ratings Services said today that it revised its outlook on MoneyGram International (Nasdaq: MGI) to negative from stable. At the same time, we affirmed our issuer credit rating and senior secured issue rating at 'BB-'.

Wal-Mart has reached an agreement with Ria Financial Services, a subsidiary of Euronet Worldwide Inc., to provide Wal-Mart-to-Wal-Mart U.S.-only money transfers at more than 4,000 of its stores at a cost below MoneyGram's existing Wal-Mart prices.

"We believe that the new service, which will become available April 24, will directly affect MoneyGram's U.S. Wal-Mart-to-Wal-Mart money transfer business, which represents about 13% of MoneyGram's total company revenue," said Standard & Poor's credit analyst Igor Koyfman. When Wal-Mart commissions are deducted, it will result in about a 9% reduction to gross profit. (We note that this new agreement with Ria does not affect MoneyGram's U.S.-to-international money transfer services.)

Wal-Mart-related transactions represented about 26% of MoneyGram's total revenue during the fourth quarter of 2013. Accounting for Wal-Mart's new offering, we expect that Wal-Mart will still contribute about 10%-15% of MoneyGram's total revenue--a large portion of which will be U.S. to international--over the next two years. This level of agent-client concentration is a risk because if the relationship was discontinued, it would hurt the company's financial results. We also believe that large agents can constrain profits by influencing product pricing or demanding additional financial concessions. At this point, MoneyGram stated that it won't lower pricing at its Wal-Mart locations. It remains unclear if MoneyGram will take future pricing actions at the remainder of its 31,000 U.S. agents.

The negative outlook reflects an increasingly competitive money transfer industry, which we believe could counteract any material benefit in earnings that relate to moderate improvements in the global economy and an increase in MoneyGram's global agent locations. The new competitive environment creates uncertainty over the next 12 months in terms of MoneyGram's market share, profitability, and cash flow.

We could lower our ratings on MoneyGram if its leverage exceeds 4.5x on a sustained basis. In our view, this could occur if financial performance deteriorates beyond our expectations as a result of competition, the company incurs higher-than-expected compliance costs, or it issues additional debt to finance a payout to shareholders. (We adjust EBITDA for nonrecurring items and debt for noncancellable operating leases and unfunded postretirement benefits.)

We could affirm the ratings and assign a stable outlook if we believe that the company will sustain leverage below 4.5x. Over the next 12 months we will continue to review the company's financial performance in light of the lower-priced money transfers offered by Ria at Wal-Mart. We could also upgrade MoneyGram if THL's and Goldman Sachs's future exit strategy doesn't result in significantly higher leverage and the company sustains leverage below 3x.



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