Euronext N.V. credit rating boosted to ’A-’ at S&P due to reduced leverage and improved earnings

Investing.com -- Euronext (EPA:ENX) N.V. (ENXT) has seen its long-term issuer credit rating upgraded to ’A-’ from ’BBB+’ at S&P Global following a significant reduction in its leverage. According to estimates, the adjusted net debt to EBITDA was down to 1.8x by the end of 2024, due to an increase in cash flow from operations. This move indicates a lower chance of substantial deterioration in leverage in the future.

The successful integration of Borsa Italiana (BI) and the expansion of Euronext Clearing across all its markets have resulted in synergies that exceeded the group’s initial expectations. The stable outlook for ENXT is based on the assumption that it will maintain its current leverage while continuing to grow its business in alignment with its strategic plan, "Innovate for growth 2027". This plan anticipates over 5% compound annual revenue growth from 2024 to 2027.

ENXT’s leverage has significantly decreased since its acquisition of BI in 2021. The strategic plan "Innovate for growth 2027" outlines financial goals and a tolerance for leverage that suggest a controlled risk appetite. It is expected that the adjusted net debt to EBITDA will have been about 1.8x and funds from operations (FFO) to debt will have been about 42% as of end-2024. These figures represent a substantial improvement from the adjusted net debt to EBITDA of 2.4x and FFO to debt of 33.3% as of end-2023.

ENXT has plans to maintain a debt-to-EBITDA ratio of approximately 1.0x-2.0x in the long term. This suggests that leverage could decrease further in the future, bolstered by strong cash generation, even if moderate share buybacks become a regular part of its financial policy.

The company’s strategy primarily focuses on organic growth, but it does not exclude the possibility of engaging in acquisitions. This is evidenced by the recent announcement of a binding agreement under which ENXT will acquire Nasdaq’s Nordic power futures business. While not part of the base case, ENXT’s strategy presentation indicates that it could undertake larger deals in the range of €3 billion-€4 billion, funded by a mix of available cash and additional debt.

ENXT completed the migration of its business to Euronext Clearing, consolidating business diversity and stability. The group finalized its integration of BI in 2024 and successfully achieved €121 million in run-rate EBITDA synergies by the end of September 2024, exceeding the €115 million target announced two years prior.

Euronext Clearing is now the primary or sole clearinghouse for cash equities and listed financial and commodity derivatives executed in almost all ENXT’s markets. This has enhanced the group’s revenue diversification and improved earnings stability, with non-volume related revenue representing 59% of the total revenue base, compared with 51% in 2018.

ENXT is expected to sustain an improved EBITDA margin above 60%, supported by increased cash generation from operations and the phasing out of BI integration costs. Revenue growth of about 10% is anticipated for 2024, primarily led by fixed-income trading revenue and post-trade activities. This implies an adjusted EBITDA margin of about 63% for 2024, a significant improvement from broadly 56%-58% in the few years to 2023.

ENXT continues to show solid resilience to a hypothetical Italian sovereign default. Following ENXT’s acquisition of BI in 2021, Italy became an important market for the group. It is expected that ENXT will continue to derive about 35%-40% of its revenues from its Italian businesses.

The stable outlook reflects expectations that ENXT will maintain its current lower level of leverage, supported by strong cash generation and solid execution of its "Innovate for growth" strategy. While a large M&A transaction is not ruled out, leverage is expected to remain contained.

A downgrade could occur if a large debt-fueled M&A significantly worsens ENXT’s financial risk profile, with the adjusted net debt-to-EBITDA ratio increasing substantially and sustainably above 2.5x. Similarly, adjusted FFO to debt moving materially below 35% could also lead to a downgrade. An upgrade is considered remote within the two-year outlook horizon as the group is not expected to adopt a minimal risk appetite with very low tolerance to any spikes in leverage.

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