S&P Upgrades NASDAQ OMX Group (NDAQ) to 'BBB' Following Reassessment

Standard & Poor's Ratings Services said it raised its issuer credit and senior unsecured debt ratings on Nasdaq Inc. (Nasdaq: NDAQ) to 'BBB' from 'BBB-'. The outlook on the issuer credit rating is stable.

We raised the ratings on Nasdaq to reflect our reassessment of the impact of the company's double leverage on the rating. Our group credit profile on Nasdaq remains 'bbb+'. Previously, the rating on the nonoperating holding company (NOHC) was two notches lower than the group credit profile. We have narrowed that differential to one notch.

"Although Nasdaq's double leverage is very high compared with other rated financial market infrastructure companies', we believe the company has several compensating factors that mitigate some of the risk that significant double leverage can present for NOHC creditors," said Standard & Poor's credit analyst Olga Roman. "While the company's total double leverage was about 190% as of Sept. 30, 2015, its double leverage was about 105% when we considered only those subsidiaries that have regulatory capital requirements." Nasdaq generates a majority of its consolidated EBITDA at subsidiaries that have no minimum regulatory capital requirements (even though some of them are regulated), and we believe regulators have limited capacity to prevent the NOHC from upstreaming dividends from these subsidiaries. Additionally, the EBITDA contribution from nonregulated subsidiaries leaves ample room for the company to meet financial commitments at the holding company level based on dividends (and cash flows) from nonregulated subsidiaries. Furthermore, we believe Nasdaq has ample liquidity available at the holding company, including cash at the parent level and $440 million available under its $750 million revolving credit facility as of Sept. 30, 2015.

We have revised Nasdaq's business risk profile to "strong" from "satisfactory" to better capture its diverse and stable business mix. Our assessment reflects the company's leading market share positions in most of the businesses it operates, including cash equity and equity options trading, listings, market data, market technology, and corporate solutions. Nasdaq has a strong competitive advantage as one of two major U.S. equity listings venues, and Nasdaq Stockholm AB is the primary securities exchange of the Nordic countries with a market share close to 70% in cash equity. As of Sept. 30, 2015, The NASDAQ Stock Market listed 2,850 companies with a combined market capitalization of approximately $7.7 trillion, and in Europe, the Nasdaq Nordic and Nasdaq Baltic exchanges, together with Nasdaq First North, were home to 835 listed companies with a combined market capitalization of approximately $1.1 trillion.

For the nine months ended Sept. 30, 2015, Nasdaq's equity exchanges had 19% total matched market share in U.S. equities, and market share reported to the FINRA/NASDAQ Trade Reporting Facility was 32%, resulting in total market share in U.S. cash equity trading of 51%. Nasdaq's three U.S. options exchanges had 25% total matched market share in U.S. equity options.

We chose to weight the stability of Nasdaq's business and predictability of its results more heavily in our business risk profile assessment, and we now use the medial volatility financial ratio benchmark table, versus the low volatility ratio table we used previously. As a result, we revised Nasdaq's financial risk profile to "intermediate" from "modest." Based on EBITDA in the 12 months ended Sept. 30, 2015, Nasdaq's debt to adjusted EBITDA and funds from operations (FFO) to debt were about 2.2x and 32%, respectively. We expect the company to operate with debt to adjusted EBITDA around 2.5x, FFO to debt of 30%-35%, and adjusted EBITDA to interest of approximately 9x over the next two years. Although the company's debt-to-EBITDA ratio is below the 2.5x threshold that we consider a modest financial risk assessment, its FFO-to-debt ratio is more in line with an intermediate financial risk profile. When these two ratios diverge, we typically give priority to the FFO-to-debt ratio.

The stable outlook reflects our expectation that Nasdaq will maintain its favorable competitive position in the U.S. and Nordic securities and derivatives markets and will operate with FFO to debt of 30%-35% and debt to adjusted EBITDA around 2.5x over the next 18-24 months. We expect the company to maintain its double leverage (from subsidiaries with regulatory capital requirements) excluding investments into subsidiaries without regulatory capital below 120% and maintain substantial coverage of interest expense from EBITDA from nonregulated subsidiaries.

If the company pursues more aggressive financial policies that result in debt to EBITDA increasing above 3.5x, we could lower the ratings. Additionally, we could lower the ratings if the company's double leverage (from subsidiaries with capital requirements) increases above 120% or if its financial safeguards of Nasdaq Clearing weaken materially. If Nasdaq continues to operate with a debt-to-adjusted EBITDA ratio of less than 2.5x and improves its FFO-to-debt ratio to more than 35%, we could revise our financial risk assessment to modest and upgrade the company.

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