Fitch Downgrades MoneyGram's IDR to 'BBB-'; On Rating Watch Negative.

NEW YORK -- Fitch Ratings has downgraded and placed the Issuer Default Ratings (IDRs) and debt ratings for MoneyGram International Inc. (MoneyGram) on Rating Watch Negative as follows:

--Long-term IDR to 'BBB-' from 'BBB';

--Senior unsecured revolving credit facility to 'BBB-' from 'BBB';

--Short-term IDR to 'F3' from 'F2'.

Fitch's action affects approximately $350 million in total debt.

The ratings downgrade and Rating Watch Negative status reflects the following considerations:

--MoneyGram recently drew down the remaining $200mm available under its $250 million revolving credit facility which expires in June 2010 leaving the company with no remaining committed sources of liquidity;

--MoneyGram recorded $230 million in net unrealized losses on the company's investment portfolio during third quarter-of 2007 (end Sept. 30) which prompted a draw down of its revolving credit facility to increase its surplus of unrestricted assets over settlement obligations. MoneyGram's investment portfolio largely reflects settlement assets from its official check business and the company is contractually required to maintain a one-to-one balance between settlement assets and settlement liabilities. As of Sept. 30, 2007, MoneyGram had a surplus of $286 million in settlement assets relative to its settlement liabilities. Following the increased borrowings from its RCF, Fitch estimates MoneyGram's leverage (total debt/total operating EBITDA) at 1.5 times (x) and adjusted leverage (total adjusted debt/total operating EBITDAR) at 3.0x.

--MoneyGram has limited liquidity sources after the drawdown of the revolving credit facility. MoneyGram relies on other uncommitted sources for day to day liquidity to manage swings in its settlement business including a $400 million off-balance sheet receivables sales facility plus various repurchase agreements with large financial institutions. Since drawing down the balance of its credit facility, MoneyGram has not needed to access its repo facilities. Fitch believes a majority of the receivables sales facility has been utilized.

--MoneyGram announced that it has retained an advisory firm to complete a strategic review of its Payment Systems business. Part of Fitch's review for the Rating Watch Negative will focus on the liquidity impact and changes to MoneyGram's operational and financial profiles from any transaction.

Due to on-going issues in the credit market, Fitch remains concerned that MoneyGram could be prevented from accessing a portion or all of the aforementioned uncommitted sources of liquidity. Under this scenario, MoneyGram would likely need to sell assets to raise liquidity, potentially at below market prices and likely to the detriment of the balance sheet. MoneyGram could also seek additional equity investments to strengthen the balance sheet and provide liquidity.

MoneyGram has a covenant in its credit facility agreement that requires the company to maintain a maximum debt to total capital ratio of 50% or less. However, the definition of total capital in the covenant excludes accumulated other comprehensive income. As a result, any unrealized loss from MoneyGram's investment portfolio is added back to the calculation of total capitalization (or conversely a gain is subtracted). Fitch estimates that MoneyGram's debt to capital ratio under this definition is approximately 34% which would not change due strictly to further unrealized losses but could increase if the company assumes additional debt financing.

Resolution of the Rating Watch Negative status could occur under a number of various scenarios including:

--MoneyGram secures additional sources of committed liquidity;

--MoneyGram concludes its strategic review of the payment systems business with a divestiture of the business and settlement portfolio;

--Improvements in the credit market could result in unrealized investment gains which could enable MoneyGram to reduce the balance outstanding under its RCF without endangering its required one-to-one relationship between settlement assets and settlement liabilities.

A further deterioration in the credit market could lead to additional devaluations and unrealized losses in MoneyGram's investment portfolio which Fitch believes could result in a downgrade of MoneyGram's rating but would not necessarily resolve the Rating Watch Negative status.

MoneyGram's credit profile continues to be supported by the strength in its Global Funds Transfer business which generates approximately 80% of total EBITDA for the company.

Credit strengths include the following:

--MoneyGram is one of the leading vendors in the international remittance market particularly in U.S. to Mexico transactions which is the largest global remittance corridor;

--Strong revenue growth over the past year which Fitch believes reflects incremental market share gain for MoneyGram in the international remittance market as well as growth in demand for remittance services;

--The money transfer business produces relatively consistent cash flow with growing, but still modest, capital spending requirements; and

--Fitch's view that the market for international remittance can sustain growth rates above worldwide GDP due to growth in migrant labor and that MoneyGram should be able to capture that growth plus incremental market share, particularly due to the fragmentary nature of competitive environment. In addition, Fitch expects MoneyGram's EBIT margin in its Global Funds Transfer segment to stabilize going forward as the company absorbs a recent increase in spending to expand its global footprint.

Rating concerns in addition to the aforementioned liquidity issues include the following:

--Continued pricing pressure in the U.S. to Mexico and domestic remittance markets which has negatively affected MoneyGram's margins over the past year, although EBIT margins in the Global Funds Transfer segment remain in the high-teens;

--The increasing threat of competition from new remittance market entrants, particularly from banks;

--Legislative and regulatory, both in the US and abroad, impacting migrant labor flows;

--Regulatory issues affecting the compliance requirements of international remittance flows, particularly as it concerns Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations, as well as individual country regulations on the licensing of remittance businesses, such as in France where MoneyGram's effort to penetrate that market by establishing traditional agent relationships has been hampered by the requirement to hold a banking license;

--Moderate risk due to customer concentration as Walmart (rated 'AA' by Fitch) accounts for approximately 20% of total revenue; and

--Event risk associated with the potential for shareholder friendly actions and future acquisitions.

As of Sept. 30, 2007, liquidity was constrained and consisted solely of $286 million of unrestricted assets in excess of settlement obligations, largely reflecting the drawing down of MoneyGram's revolving credit facility. MoneyGram has fully utilized its $250 million senior unsecured revolving credit facility maturing June 2010. Due to MoneyGram's official check business and associated settlement assets and liabilities, the company categorizes its entire cash balance as substantially restricted cash. The surplus in unrestricted assets represent the difference between the sum of substantially restricted cash, receivables and investments minus payment service obligations which Fitch views as an alternative estimate of available liquidity. In addition, MoneyGram utilizes an off-balance sheet accounts receivable financing program which provides up to an additional $400 million in liquidity, of which approximately $50 million was available to the company.

MoneyGram's total debt as of Sept. 30, 2007 was $350 million, which is comprised of $100 million outstanding under a term loan due June 2010, and $250 million outstanding under the company's revolving credit facility that matures June 2010, both of which are part of a $350 million combined bank facility. In addition, MoneyGram has approximately $352 million outstanding under an off-balance sheet accounts receivable financing program which expires December 2007.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.