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Western Union Disappoints Fitch

WU MGI

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Leading money transfer company, Western Union Co. (WU - Analyst Report) received a negative rating action from rating agency Fitch ratings, which dragged  down the Issuer Default Rating (“IDR”) and all senior unsecured ratings of the former to 'BBB+' from 'A-' . The ratings also carry a negative outlook.

This downward rating action reflects Western Union’s lowered guidance for 2013 compared with expected 2012 results. Western Union also forecasts a decline in net income by 10%–15%. The rating agency is concerned with declining pricing for remittance service in some international markets, where the company has lost its market share. 
 
Western Union is facing compliance-related issues in Mexico and Latin America. In Mexico, overall revenue decreased due to deterioration in its Vigo and Orlandi Valuta brands. Western Union ended its relationships with over 7,000 Vigo agent locations that could not meet the new compliance requirements.
 
The company has also experienced operational challenges from related system implementations for its Vigo brand in Latin America. The rating agency believes that though the price decline will help the company to gain back its lost market, bottom-line margins will shrink due to lowering of prices, thus compressing overall margins.  
 
Western Union is also lagging behind in its technology offerings, and is aggressively seeking to invest in these fields. Fitch is of the opinion that this particular step will increase company’s operating expense. Also, the rating agency believes that the recent dividend increase of 25% by the company is more than it can afford. 
 
However, the rating agency noted that the Western Union’s traditional business remains strong. The company continues to hold a strong brand name. The rating agency also notes that cash remittance, in which the company holds a major standing, will continue to constitute a major component of overall remittance market, thus limiting the potential competition from cash-less based remittance alternatives. 
 
Western Union’s key positives include a globally diversified business operation, a wide agent network and a low cost variable operating cost structure. 
 
The company may see a further negative rating action if compliance risk results in any unseen liability; less remittance thus uprooting its traditional physical transfer business; operational risk from excessive use of cash for dividend payment and share buyback. 
 
Peer MoneyGram International Inc. (MGI - Analyst Report) carries a ‘B+’ rating from Fitch. 
 
Western Union currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Underperform recommendation on its shares. 

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