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Nielsen Holdings plc (NLSN - Analyst Report) proposed $500 million seven year senior secured term loan was assigned “Ba1” rating by Moody's Investors Service, the credit rating agency of Moody’s Corporation.

The proceeds from this offering will be used to repay the company's existing $490 million term loan as well as transaction expenses.

Additionally, the rating agency assigned the “Ba3” corporate family rating (CFR) and “Baa3-PD” Probability of Default Rating (PDR) to Nielsen. All the ratings carry a positive outlook.

Rationale Behind the Rating

The Ba1 debt rating reflects Nielsen’s moderately high leverage and possible increases in dividend payouts if earnings and share repurchases grow in the future. The agency believes that the cash, which is distributed as quarterly dividends, could be used to reduce debt or fund acquisitions.

In the last reported second quarter, Nielsen’s gross debt was $8.008 billion, higher than $7.660 billion at the end of first-quarter 2016. Also, net debt (gross debt excluding cash and cash equivalents) was $7.662 billion, and net debt leverage ratio was 4.03x at the end of the quarter. The company also repurchased $221 million of its stock during the second quarter.

The rating agency has maintained the Ba3 CFR rating based on the company’s continued growth and leadership in the international markets. The agency expects the company to maintain its low-to-mid single digit percentage revenue and EBITDA growth on a constant currency basis.

However, the rating is restricted as Moody’s is cautious about the challenging operating environment in Nielsen's Buy and Watch divisions due to changing spending habits of its clients and increasing competition in the rapidly growing digital markets.

Nevertheless, Nielsen’s continuous effort to launch new products is a big positive. The rating agency believes that the company’s huge product portfolio and service offerings will help it maintain its leadership and respond to the changing technology. The recently introduced Total Audience Measurement provides a single-sourced platform to measure viewing across screens including linear TV, VOD, DVR, connected TV devices, PC, and tablets.

Moody’s assigned a positive outlook on the rating based on its expectation that the company will be able to lower its debt. Also, it expects Nielsen to deliver operating results in line with its recent guidance for 2016 (4%-6% revenue growth and 50 bps-70 bps improvement in adjusted EBITDA margins).

Bottom Line

Nielsen’s ratings could be upgraded if the company generates steady earnings growth, meaningful free cash flow, and is able to reduce its leverage. Also, Nielsen needs to maintain good liquidity.

On the other hand, the company’s ratings could receive a downgrade if its debt levels increase or if its free cash flow generation comes under pressure. Also, deterioration in liquidity could create downward rating pressure.

As a leading provider of media and marketing information on what consumers watch and buy both locally and internationally, Nielsen remains focused on developing new technology driven products that utilize its core competencies to enable its customers accelerate the time-to-market of their next-generation products.

Currently, Nielsen carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are National Research Corp. (NRCIA - Snapshot Report) , sporting a Zacks Rank #1 (Strong Buy), and Hooper Holmes Inc. (HH - Snapshot Report) and LifeLock, Inc. (LOCK - Snapshot Report) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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