-- CoreLogic Inc., a Santa Ana, Calif.-based leading provider of real-estate related data, analytics, and other services, recently concluded its exploration of strategic alternatives to enhance shareholder value.
-- The company has decided to focus on its existing business, and plans to prioritize debt repayment ahead of potential shareholder returns.
-- We are affirming the 'BB' corporate credit rating, and revising the outlook to stable from negative.
-- The stable outlook reflects greater clarity regarding CoreLogic's financial policies and our expectation the company will maintain a moderately leveraged financial profile.
On Feb. 29, 2012, Standard & Poor's Ratings Services affirmed its 'BB' corporate credit rating on CoreLogic Inc., and revised the outlook to stable from negative.
The outlook revision reflects Corelogic's conclusion of its strategic evaluation, resulting in improved clarity of financial policies and financial profile expectations.
The rating incorporates our expectation that CoreLogic's leadership position in key markets and focus on reducing costs will support consistent profitability, despite our expectation for lower U.S. mortgage originations in fiscal 2012. The ratings also reflect our view that leverage will decrease to the 2.5x to3.0x range from about 3.0x at present, supported by the company's plans for debt repayment. We note that CoreLogic is the surviving company from the June 2010 spin-off of First American Corp.'s financial services business.
With last-12-month revenues of $1.34 billion, CoreLogic provides mortgage origination processing services (about 44% of 2011 revenues), mortgage analytical data (40%), and default management services (16%). CoreLogic's "fair" (as our criteria define the term) business risk profile reflects a strong position in fragmented markets, offset by significant customer concentration (the company's top 10 customers accounted for about 40% of 2011 revenues) and vulnerability to economic and credit cycles. Barriers to entry, which include the investment and expertise CoreLogic requires to build the databases and analytics at the core of the company's solutions, support the company's market position.
CoreLogic's "significant" financial risk reflects significant earnings exposure to mortgage origination and servicing activity, which the Mortgage Bankers Assn. expects will be weak in 2012. We expect low-single-digit revenue growth and adjusted EBITDA margins to remain in the low-20% area, with support from restructuring actions and growth in data and analytics markets, mitigated by weak mortgage originations. Adjusted debt to EBITDA was about 3x as of Dec. 31, 2011. We note that revenues in the fourth quarter of 2011 were $345 million, up about 4% from the prior-year period, excluding 2011 acquisitions.
The company generated about $100 million of free operating cash flow in 2011. Reductions in dividends from unconsolidated investment affiliates have caused some volatility in cash flows, but we expect annual free cash flow to be relatively stable. In May 2011, CoreLogic acquired RP Data Ltd. for approximately $184 million. Although CoreLogic has been moderately acquisitive, the company has very limited capacity for additional leverage at the current rating.
CoreLogic has "adequate" liquidity, with sources of cash likely to exceed uses for the next 12 to 24 months. Sources include cash balances of about $260 million as of Dec. 31, 2011 and positive annual free operating cash flow. We expect uses to include moderate working capital investments, and capital expenditures in the $65 million to $85 million range.
Relevant aspects of CoreLogic's liquidity, in our view, are as follows:
-- We see coverage of uses to be in excess of 1.2x for the next 12 months, including modest near-term debt maturities.
-- The company has additional liquidity in availability under CoreLogic's $550 million revolving credit facility maturing May 23, 2016.
-- Financial covenants in the company's first-lien facilities include a maximum debt to EBITDA ratio of 4.25x, which declines to 3.5x over time. We note no near-term covenant step-downs.
-- CoreLogic repurchased about $175 million of common stock through June 30, 2011. However, the current rating does not incorporate additional, material, near-term share repurchase activity.
-- The company does not pay regular cash dividends. Recovery analysisFor the complete recovery analysis, see the recovery report on CoreLogic, published Dec. 21, 2011, on RatingsDirect.
The outlook is stable, reflecting our expectation that modest growth in CoreLogic's data and analytics business will offset the weakness we expect in its mortgage origination business. We also expect CoreLogic to focus on debt reduction, such that leverage subsides to between 2.5x and 3.0x in the near term. Business exposure to mortgage origination market weakness constrains any near-term potential for an upgrade. We could lower ratings if CoreLogic sustains debt to EBITDA in excess of 3x due to a more aggressive financial policy or greater-than-anticipated market weakness and earnings decline.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; Outlook Action
Corporate Credit Rating BB/Stable/-- BB/Negative/--
Senior Secured BB+
Recovery Rating 2
Senior Unsecured B+
Recovery Rating 6