S&P Upgrades FTI Consulting (FCN) to 'BB+'; Outlook is Stable
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S&P Global Ratings said today that it raised its corporate rating on FTI Consulting Inc. (NYSE: FCN) to 'BB+' from 'BB'. The rating outlook is stable.
At the same time, we raised our issue-level rating on FTI's senior unsecured notes to 'BB+' from 'BB'. The recovery rating remains '3', indicating our expectation for meaningful recovery (50%-70%; lower half of the range) of principal in the event of a payment default.
"The upgrade is based on FTI's good operating performance, lower debt leverage, and our expectation that the company's adjusted debt leverage will remain comfortably within our 2x-3x leverage threshold," said S&P Global Ratings credit analyst Andy Liu. The company's corporate finance practices have generated very strong results as oil and gas and retail sectors experience a period of distress. Additionally, after some periods of softness, FTI's economic consulting and strategic communications practices are growing at very healthy rates, which we expect will continue. However, demand for the company's technology and forensic and litigations consulting (FLC) practices remains weak. With several large projects winding down and continual pricing pressure on smaller projects, we don't expect the technology practice to turnaround quickly. Additionally, the demand for the company's FLC services has remained somewhat soft. We expect that adjusted debt leverage will remain below 3x over the next two years. With its solid operating performance, it's possible that FTI could expand and accelerate its share repurchase program and perhaps be slightly more aggressive with acquisitions. However, we don't expect a significant departure from the company's current policy on debt leverage.
The stable rating outlook is based on our expectation that FTI will experience modest revenue growth, mainly due to decline at its technology practice, and its adjusted debt leverage will remain below 3x.
We could lower our corporate credit rating on FTI if the company adopts a more aggressive financial policy regarding debt-financed acquisitions or debt-financed share repurchases, such that adjusted debt leverage increases above 3x. We could also lower the rating if the technology practice continues to decline, such that it causes a marked, overall EBITDA decline.
An upgrade is more dependent on an improvement in our view of FTI's business and competitive position than its adjusted debt leverage. Although unlikely, we could raise the rating if FTI profitably grow its various practices in terms of scale and geography, and the company maintains an adjusted debt leverage of less than 2x. Additionally, an upgrade would also depend on FTI maintaining an EBITDA margin well in excess of 15%--in line with its rated peers.
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