S&P Downgrades MoneyGram (MGI) IDR to 'B+'; Outlook Stable

Standard & Poor's Ratings Services said today it lowered its issuer credit rating on MoneyGram (NASDAQ: MGI) to 'B+' from 'BB-'. The outlook is stable.

At the same time, we lowered our issue-level ratings on MoneyGram's senior secured $980 million term loan and $150 million revolving credit facility to 'B+' from 'BB-'. The recovery rating remains '3', indicating our expectation for meaningful (50%-70%) recovery for lenders in the event of a payment default. Our recovery expectations are in the lower half of the 50%-70% range.

"The downgrade reflects our revised forecast for 2015 EBITDA to decline by approximately 10%, incorporating the significant U.S. market share MoneyGram has lost in 2014 and the pricing actions the company introduced," said Standard & Poor's credit analyst Igor Koyfman. Under our revised forecast, we believe MoneyGram's debt to EBITDA, as defined by Standard & Poor's, will be in the mid-5x area, which we consider to be "highly leveraged." Our calculation of leverage does not align with MoneyGram's financial covenants and we expect the company to stay in compliance with the 4.75x total secured
leverage covenant through Dec. 31, 2015.

Although MoneyGram's cross-border business has delivered strong results, the increasingly competitive environment has affected the U.S.-to-U.S. corridor. During the second quarter of 2014 Wal-Mart 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 Wal-Mart prices. On a year-over-year basis, fourth-quarter 2014 money-transfer volume was down 40% for the U.S.-to-U.S. corridor, up 12% for non-U.S. send transactions, and up 14% for U.S.-outbound transactions (including 14% growth in U.S.-to-Mexico). MoneyGram also cut prices during the fourth quarter.

Our "fair" business risk assessment is based on MoneyGram's good market position in the money-transfer industry, especially internationally, and steady growth of the remittance market. The company's money-transfer business, which generates more than 90% of total revenues, provides money-transfer and bill-payment services to consumers through a network of approximately 350,000 agent locations. MoneyGram is one of the largest global money transfer companies, behind market leader Western Union.

Still, we believe that MoneyGram's agent-client concentration is a risk factor. If one or more of the company's critical relationships were discontinued, it would hurt the company's financial results. Large agents can constrain profits by influencing product pricing or demanding additional financial concessions. Within the Global Funds Transfer segment, the top 10 relationships contribute 39% of total company revenue during 2014, with Wal-Mart remaining as the top agent.

The stable outlook reflects our expectation for continued growth in MoneyGram's U.S. outbound and non-U.S. transactions, coupled with expansion of the self-service money transfer business. Still, we believe competition could counteract any material benefit in earnings that relate to moderate improvements in the global economy and an increase in its agent locations.

MoneyGram's concentrated ownership and relatively high agent concentration in its Global Funds Transfer segment will continue to limit the rating. However, we would upgrade MoneyGram if we were confident that leverage would be maintained well below 5x and that THL's and Goldman Sachs's future exit strategy wouldn't result in significantly higher leverage.

We could lower the rating if MoneyGram incurs higher-than-expected compliance costs, financial performance deteriorates as a result of competition, or the company issues additional debt to finance a payout to shareholders.

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