TNS Customer Loss Can Be Overcome

Transaction Network Services' (TNS) largest customer First Data Corp. may not renew its contract but the loss may not affect the company's credit rating. TNS is currently in negotiations with First Data, but thinks it's unlikely that it will maintain the same level of transactions with First Data, noted Pam Bentley, TNS' v.p. finance and investor relations. "We wanted to let Wall Street know... that the loss of the First Data contract is not going to hurt our earnings guidance going forward," Bentley said.

Moody's Investors Service has assigned a Ba3 rating to TNS' $65 million term loan and $30 million revolver. The debt was put in place in March in conjunction with the company's IPO. GE Capital leads the credit, which is priced at LIBOR plus 2 1/4% as of July 1.

"We think that it is possible, even if the current arrangement is not renewed, that the faster-than-expected growth in other business lines could provide sufficient revenue and margin support such that the ratings could be maintained," noted Marie Menendez, v.p. senior credit officer with Moody's. "If the First Data arrangement is not renewed it's not a foregone conclusion that there will be a downgrade." Bentley said the company is comfortable within the confines of the credit agreement. The required leverage for the second quarter of 2004 was 2.2 times and the actual leverage ratio was 1.3 times, she noted. The ratings have also been supported by TNS' improved capital structure following the IPO and the conversion of preferred shares, which reduced effective debt-to-EBITDA from six times.

The bank loan rating is the same as the senior implied rating. "The secured holders are not getting any additional lift," Menendez noted. "The whole issue is what happens to the ratings overall." TNS provides transaction processing services. One issue is TNS' lack of tangible assets, which were around $120 million in June. "The low level of tangible assets is not enough to drive the bank debt rating higher than the senior implied rating," she added.