NASDAQ Escapes Moody’s Review Without A Downgrade

by Trefis Team
Nasdaq OMX Group
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    Quick Take
  • Moody’s recently spared NASDAQ OMX from a ratings downgrade which it had been considering due to the exchange operator’s high debt levels in the wake of two big acquisitions.
  • However, the company has adopted a more conservative approach to manage its leverage and allayed those concerns.
  • Strategically, the company’s latest acquisition of eSpeed seems to be a good move as it provides it with a strong entry point into the fixed income business.

Recently Moody’s investor services reiterated NASDAQ OMX’s (NASDAQ:NDAQ) senior debt rating to be Baa3 with a stable outlook. With this announcement, the exchange operator escaped the threat of a ratings downgrade. [1]

The rating agency had put the exchange on review at the start of April following the announcement of its plan to acquire eSpeed, an electronic bond trading platform, from BGC Partners Inc. for about $1.2 billion ($750 million in cash and the rest as NASDAQ common stock over 15 years depending on certain contingencies). ((Moody’s places NASDAQ OMX (senior at Baa3) on review for downgrade, Moody’s Investor Services, April 1, 2013))

See our full analysis for Nasdaq OMX

The exchange was put on review because it was already in the process of acquiring Thomson Reuters’ Corporate Services business. The rating agency feared that undertaking two acquisitions at one time could undermine the company’s financial profile and increase its debt levels significantly. Moody’s estimated that NASDAQ would require additional debt of around $1.1 billion to fund the two acquisitions.

However, the company has declared that it will halt its share repurchase program to pay back debt and deploy more of its existing cash to finance the two acquisitions. This is a more conservative approach and will ensure that NASDAQ’s debt levels remain in control. Accordingly, Moody’s determined that the situation did not warrant a downgrade.

This is positive news for the company, and we believe that other rating agencies could follow suit. Standard & Poor’s was another rating agency that had put NASDAQ on review for the same reason, and it is likely that it will also give the company some slack in the light of its more conservative approach.

Strategically eSpeed Seems Like A Good Acquisition

U.S. Treasury trading volumes are currently suppressed because the Federal Reserve continues to buy and sit on a large amount of U.S. Treasury and Federal Agency securities as part of its monetary easing efforts. However, once the macroeconomic environment improves, this bond buying program is bound to stop and Treasury trading volumes are likely to increase significantly. When that happens, NASDAQ will be well positioned to benefit from the increase in Treasury volumes as eSpeed is one of the two primary electronic broking platforms for U.S. treasuries. [2]

The platform also presents NASDAQ with a cross-selling opportunity where it can offer existing customers the option of electronically trading in U.S. treasuries. The company is also likely to use eSpeed as a base from which it can later expand into other fixed income products. It should be noted that NASDAQ is buying only the liquid treasury capability of eSpeed. BGC Partners will retain control of non-liquid bonds, derivatives and market data capabilities of eSpeed.

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  1. Moody’s confirms Baa3 rating of NASDAQ OMX; outlook Stable, Moody’s Investor Services, May 22, 2013 []
  2. ICAP in demand after assets look undervalued next to rival’s US deal, Telegraph, April 2, 2013 []
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