Outlook action: Outlook revised to negative from stable
Despite the company's strong market position, Moody's considers ongoing competitive pressures on ADP's business, including possible disruptions associated with new technologies, which may increasingly weigh on ADP's credit quality. The company's credit rating also considers ADP's exposure to economic cyclicality with respect to employment levels and interest rate volatility as well as shifting structural trends and work arrangements within the company's markets.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The Human Capital Management sector has been significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in ADP's credit profile, including its exposure to rising unemployment, particularly in the U.S., have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and ADP remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on ADP of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
Additional risks to the issuer's credit quality include ADP's smaller scale relative to its rated peer group, service line concentration, limited geographic diversity, historical focus on acquisitions and shareholder returns, and potential reputational risk in the event of a data security or customer privacy breach of the company's systems.
The negative rating outlook reflects Moody's expectation that ADP's revenues will contract (on an organic basis) at a mid to high single digit rate in FY21 (ending June) with more significant declines in EBITDA during this period. Despite this contraction, debt/EBITDA (Moody's adjusted) is expected to remain below 1x. The outlook could be revised to stable if ADP demonstrates stronger than expected operating performance trends, particularly with respect to profitability levels and free cash flow generation.
- > Now this is completely without Moody's knowledge of ADP's mass layoff policies they have chosen in the past 4 years and continue to erode the soul and knowledge of ADP. Wait till that is fully exposed to Moody's and the news outlets. I am taking action now. —