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Equifax's Own Credit Score Near Junk Status

By David Phillips

Updated on: November 18, 2008 / 11:53 PM EST / MoneyWatch

Investments in new products, such as updated identity theft protection programs, and strategic acquisitions have helped Equifax, one of the largest U.S. credit information agencies, find new avenues of growth to offset sluggish demand at its core U.S. operations, its credit reporting and mortgage loan origination services. For the nine-months ended September 30, sales grew year-on-year due to strength in Latin American and incremental revenue contributed by TALX, a provider of employment verification and related human resources/ payroll services acquired in May 2007 for approximately $1.1 billion.

Turmoil in the financial markets however, has temporarily limited Equifax's ability to finance any new initiatives via the credit markets, as the company pointed out in its third-quarter FORM 10-Q regulatory filing:

The credit markets, including the commercial paper markets in the U.S., have recently experienced adverse conditions. The economic turmoil that has arisen in the credit markets may negatively impact our ability to issue commercial paper or public debt in the future. We had $20.0 million of commercial paper outstanding at September 30, 2008, down from $219.5 million at December 31, 2007. We expect to have adequate cash positions and available borrowing capacity under our committed credit facilities to absorb these maturities, if circumstances require, and we are, therefore, not currently dependent upon the commercial paper market to fund any short-term liquidity needs. In the event that we are temporarily unable to issue sufficient commercial paper to fund any short-term liquidity needs or public debt to fund any long-term liquidity needs, we expect to borrow under our Senior Credit Facility.

At September 30, $365 million was available under its Senior Credit Facility. If the company were to announce a potential change in control, which resulted in a downgrade in its credit rating by any of the major credit bureaus, such as Standard & Poors or Moody's, below investment grade, the event could trigger an automatic call for repayment of $465 million within 60 days of the notice change.

As of February 15, Equifax's own credit rating for its senior unsecured debt of Baa1 by Moody's Investors Service -- one level above junk status -- was worse than many of the consumers it ranks, for goodwill and other intangibles represented almost 73 percent of assets. Despite the challenging business climate, Moody's is unlikely to reduce Equifax's credit rating, for its financial metrics -- leverage (measured by debt to EBITDA) and free cash flow to debt have improved year-to-date: from 2.4X for FY 2007 to about 2.0 times, and 310 basis points to 22.9 percent.

Equifax, however, is navigating through a difficult business environment, with fewer mortgage origination credit score requests and the consolidation in the financial industry. Management guided fourth-quarter revenue down about six percent to seven percent, in the range of $453 million to $463 million compared with last year.