Fitch Affirms Thomson Reuters' 'A-' IDR; Outlook Remains Stable

TRI

--Issuer Default Rating (IDR) at 'A-';

--Bank credit facility at 'A-';

--Senior unsecured notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Reuters Finance PLC

--IDR at 'A-';

--Senior unsecured at 'A-'.

Fitch has also affirmed and withdrawn the following ratings:

Reuters Group Limited (Formerly Reuters Group PLC)

--IDR at 'A-', withdrawn;

--Senior unsecured at 'A-', withdrawn.

Fitch's ratings on TRI reflect:

--The company's meaningful cash flow generating ability, its sound balance sheet and its consistent and conservative financial policies. Fitch expects the company will continue to target 2.0 times (x) unadjusted net leverage.

--The growth prospects, product-line and geographic diversity of its cash flow streams also support the rating.

--Fitch recognizes there are meaningful barriers to entry in TRI's core businesses and that there are a limited number of well-capitalized, rational competitors that compete predominantly on product differentiation, quality and delivery (rather than on price).

--Unlike certain subsectors of advertising based media, TRI has already made the transition to electronic delivery and faces very little threat of substitution by digital transplants.

Rating concerns include:

--The cyclicality of the markets division;

--Potential that cost cuts might not offset cyclical revenue weakness under stress scenario;

--Potential for debt-funded acquisitions or more aggressive stance toward share buybacks.

TRI's divisions are each well positioned in their markets. The company delivered modest top line growth (before foreign currency impacts) and margin expansion in the first quarter of 2009 in most of its business lines. However, given the economic environment, Fitch recognizes that some clients (particularly in the Markets Division) could reduce spending by canceling or negotiating a lower price when contracts come due. Fitch's base case expectations, which are more conservative than management guidance, include organic revenue down in the Markets Division in the mid single digits offset by flat to low single digit revenue growth in the Professional Division, leading to a low single digit consolidated organic revenue decline. Foreign currency pressure would be incremental to organic revenue weakness.

Fitch recognizes that the Markets Division is exposed to several factors that are largely out of management's control, including the exposure to the changes in the general level of activity in the financial markets globally. Most notably, the former Reuters terminals business exhibited meaningful volatility in past financial market downturns (obviously compounded in the last downturn by the impact of the transition to the Euro on its currency business). Fitch recognizes that the consolidated company has diversified its business globally and by product, and has also engaged in enterprise contracts with major customers that should reduce the exposure to securities industry employment levels (subscription based on headcount). Fitch believes it is reasonable to expect that these actions have reduced cyclicality somewhat, but built into the rating is the tolerance for Markets Division revenue volatility. While management appears to anticipate a lighter downside case, all else equal, under a full, multi-year financial markets/economic stress scenario, the division could be down organically in the low-double digits range cumulatively and still hold the current 'A-' rating.

Fitch notes that on an EBITDA basis, the markets business generally exhibited less operating leverage than Fitch would have anticipated for a predominantly fixed-cost business in the past downturn. Reuters in particular was able to scale its cost structure as revenue slowed (likely due in part to an elevated cost structure in place after a decade of acquisitions). Based on the fundamental characteristics of the Markets Division, Fitch maintains that it is a relatively high operating leverage business and is not inherently scalable. However, Fitch does believe the fixed-cost structure can be addressed in a downturn as management of the combined company will have a large base to work with (approximately $10 billion of overall TRI operating costs) and the subscription nature should provide a lag (six months to a year while subscriptions expire and are not renewed), which can give visibility on the need for fixed-cost actions to preserve margins. Fitch expects that on a consolidated basis, the company could generate free cash flow (FCF) in a downturn.

Cash and cash equivalents totaled $1.3 billion as of March 31, 2009. Liquidity is also supported by its undrawn $2.5 billion revolving credit facility that expires Aug. 14, 2012. The facility includes a leverage covenant of 4.5x net debt to rolling latest 12 months (LTM) adjusted EBITDA and a change-of-control covenant which would go into effect if greater than 50% of outstanding shares were acquired. Unlike bank lenders, bonds issued prior to 2008 provided no protection to bondholders in the form of financial covenants nor do they have a cross default with the bank facility. Bondholders do have a limitation on liens over 10% of Shareholders Equity, excluding standard carve-outs. The 2008 and 2009 most recent bond issuances include a put (at 101) should a change of control and downgrade below investment grade occur and a cross-default in the event of non-payment of principal greater than 3% of Shareholders Equity. The company has issued $600 million in notes in the first quarter of 2009 (1Q09) to fund upcoming 2009 maturities. TRI is expected to continue to be the future issuer of debt securities and has around or less than $1 billion of debt coming due in each of the next five years. Given its liquidity position, ability to access capital markets and FCF generations, Fitch believes TRI's rating has the flexibility to address upcoming maturities, make prudent acquisitions and limited share repurchases. March 31, 2009 LTM FCF was $789 million. Fitch expects TRI to generate $350 million to $500 million of FCF (after dividends), based on Fitch's calculation. The company's overall pension position (in aggregate) was fully funded as of year end. Fitch does not expect any significant cash drains related to pension plan funding.

As of March 31, 2009 debt totaled $8.0 billion (this includes $600 million in new debt issued in the 1Q09 which is expected to be used to repay 2009 debt maturities) and pro forma unadjusted gross leverage of approximately 2.3x and pro forma unadjusted net leverage of 2.0x. While FCF (after dividends)-to-gross debt is weak for the rating at below 15%, cash from operations (CFO)-to-net debt is above 35% (with the difference predominantly driven by the sizable dividend). In 2008, Woodbridge Company Limited (Woodbridge) participated in a dividend reinvestment program (DRIP) for around 50% of its dividend. While this was a negotiated short-term arrangement (rather than a long-term commitment), Fitch believes it demonstrated the conservative, cooperative nature of Woodbridge, and the potential that such arrangements in the future could provide an opportunity to similarly reduce the drain on cash flow (to an extent) under certain circumstances.

Approximately $735 million of the company's total debt is at Reuters Finance PLC (a direct subsidiary of Reuters Group Limited) a subsidiary of Thomson Reuters PLC (TRP, a U.K.-based publicly traded entity). TRI and TRP cross guarantee the debt obligations of one another. In addition to the cross guarantee between TRI and TRP, there are downstream guarantees from TRP to Reuters Group Limited and from Reuters Group Limited to Reuters Finance PLC. Fitch recognizes there are no upstream guarantees from Reuters operations, but given the 'A-' IDR, Fitch's expectations of stable financial policies, the company's intention to eliminate the dual listing structure, the short-dated nature of the obligations (2010 maturity) and the lack of any material restrictions on movements of cash between the entities, Fitch links the IDRs of the issuing entities and treats the unsecured debt of the entire company as pari passu.

Rating upside is limited; however, an explicit commitment to and sustained track record of more conservative balance-sheet metrics could merit upgrade consideration. A significant acquisition or heavy repurchases that leave the company operating materially outside its targeted net leverage comfort range for several sequential periods, without a publicly stated plan to de-lever, could result in a negative rating action.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings 
Mike Simonton, CFA, +1-312-368-3138 (Chicago) 
Rolando Larrondo, +1-212-908-9189 (New York) 
Cindy Stoller, +1-212-908-0526 (Media Relations, New York) 
cindy.stoller@fitchratings.com