S&P Lowers Rating on WEX (WEX) to 'BB-' Following Evolution1 M&A Announcement

Standard & Poor's Ratings Services said it lowered its long-term issuer credit rating on South Portland, Maine-based WEX (NYSE: WEX) to 'BB-' from 'BB'. We also removed the rating from CreditWatch, where we placed it with negative implications on June 17, 2014. The outlook is stable. At the same time, we lowered our ratings on the company's senior secured and senior unsecured notes to 'BB-' from 'BB' and removed the ratings from CreditWatch negative.

The rating actions follow WEX's announcement that it has acquired Evolution1, a payments solution provider in the health care industry, for approximately $532.5 million. The company financed the acquisition with a combination of cash and borrowings under its $700 million revolving credit facility.

"Although we have incorporated WEX's propensity for making debt-financed acquisitions into our assessment, the Evolution1 acquisition is larger than we had expected," said Standard & Poor's credit analyst Igor Koyfman. "It also follows the company's previously announced plans to acquire the assets of ExxonMobil's European commercial fuel card program, Esso Card, through a majority-owned joint venture." That transaction is expected to close in fourth-quarter 2014 or first-quarter 2015.

We expect WEX's leverage, as measured by debt to EBITDA, to rise to 3.5x-4.0x as a result of the Evolution1 and Esso Card acquisitions from 2.0x in the most recent quarter and at the end of 2013. (We exclude bank deposits, but include securitizations in our calculation of debt.)

Positively, the acquisitions will provide further product mix and geographic diversification. However, the integration and future realization of synergies will present operational and financial risks.

"The stable outlook reflects our expectation that WEX will maintain its strong operating performance and successfully integrate Evolution1, as well as maintain leverage of 3.0x-4.0x over the next year," said Mr. Koyfman.

We could raise the rating if we expect debt to EBITDA to fall below 3.0x and remain there. A higher rating would also depend on the company's ability to successfully integrate its acquisitions and maintain strong profit margins. We may lower the rating if we expect the company's leverage to rise above 4.0x as a result of a deterioration in EBITDA or a significant rise in debt.

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