S&P Lowers Outlook on Wex, Inc. (WEX) to Negative Following Move to Acquire EFS

Standard & Poor's Ratings Services said today it revised its outlook on WEX Inc. (NYSE: WEX) to negative from stable and affirmed its 'BB-' issuer credit rating. At the same time, we affirmed our 'BB-' ratings on the company's senior secured credit facility, including a term loan and revolver, as well as its senior unsecured notes. We assigned '3' recovery ratings to the senior secured credit facility and the senior unsecured debt, indicating our expectation for a meaningful (50%-70%, upper half of the range) recovery for lenders in the event of a payment default.

"The negative outlook follows WEX's announcement that it has entered into an agreement to acquire Electronic Funds Source LLC (EFS), a company that provides fleet payments and other corporate solutions for the trucking industry, which we assume will close during the second quarter of 2016," said Standard & Poor's credit analyst Igor Koyfman. We expect that WEX will finance 75% of the acquisition primarily using new debt and the remaining 25% with equity. WEX received a commitment letter from a group of banks in the aggregate amount of $2.125 billion, including a seven-year $1.775 billion term loan facility and a five-year $350 million revolving credit facility. The new debt would also replace the existing senior secured term loan facility.

The proposed acquisition of EFS will be accretive to WEX's adjusted earnings and broadens the company's presence in the over-the-road fuel transaction processing services market in North America. On a pro forma basis, we expect debt to EBITDA to be 6.5x to 7.5x, but it could improve if the integration is successful, resulting in increased EBITDA and the ability to pay down its revolving credit facility. However, WEX's growth strategy via debt-financed acquisitions is a rating risk.

WEX has a history of growing through acquisitions and has successfully integrated several large companies over the past five years. Although we expected the company to grow through acquisitions, the acquisition of EFS is larger than we expected and the transaction significantly increases the firm's leverage profile. Moreover, we believe acquisitions completed at high multiples require future growth for success, increasing uncertainty about leverage projections. Finally, the possibility of a poorly executed merger is a negative rating factor.

Our ratings on WEX reflect risks associated with the company's aggressive growth strategy, reliance on dividends and other contractual payments from WEX Bank, exposure to volatility in fuel prices, and the gradual erosion of the company's high merchant commissions. Offsetting factors include the company's strong market position in the fleet cards market, high margins, well-managed credit risk, and a more diverse funding profile compared with other finance companies.

The negative outlook reflects WEX's aggressive debt-financed growth strategy and our expectation for debt to EBITDA to be above 6x pro forma for the EFS acquisition.

We could lower the rating if we expect debt to EBITDA will remain above 6x over the next two years, or if the company's liquidity position deteriorates beyond our expectation. This would likely occur if the company pursues another significant leveraging transaction within the next 12 months or if greater-than-expected competition drives EBITDA to decline. Additionally, if WEX is unable to successfully integrate EFS, we may lower our rating.

We could revise the outlook to stable if we are confident that WEX will improve and maintain debt to EBITDA (including deposits and securitization financing) well below 6x while maintaining strong EBITDA interest coverage. Leverage reduction would likely result from strong cash flow generation, which would contribute to accelerated debt repayment.

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