Fitch Upgrades Western Union's IDR to 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings has upgraded the following ratings for The Western Union Company (Western Union):

--Issuer Default Rating (IDR) to 'A-' from 'BBB+';

--Senior unsecured debt to 'A-' from 'BBB+';

--Senior unsecured credit facility to 'A-' from 'BBB+'.

In addition, Fitch has affirmed the following ratings for Western Union:

--Short-term Issuer Default Rating (IDR) at 'F2';

--Commercial paper (CP) program at 'F2'.

The Rating Outlook is Stable.

The ratings upgrade mainly reflects the following considerations:

--Higher-than-expected free cash flow generation with superior free cash flow margins and characteristics relative to peers;

--Slightly improving credit protection measures from minimal debt reduction over the last year.

Western Union reported $1 billion in free cash flow in the latest 12-month (LTM) period ended Sept. 30, 2007, representing 22% of revenue and 70% of EBITDA. The company reduced debt by $225 million to $3.3 billion in the LTM, which reduced leverage (total adjusted debt/total operation EBITDAR) to 2.3 times (x) as of Sept. 30, 2007 compared to 2.6x at Sept. 30, 2006. Free cash flow leverage (free cash flow/total adjusted debt) was 29.7% at the end of third-quarter 2007, significantly stronger than similarly rated peers.

Western Union's ratings and Outlook are supported by the following:

--Extensive domestic and growing international agent network with a strong worldwide brand;

--Solid liquidity and financial flexibility with consistent annual free cash flow in excess of $800 million;

--Revenue stability from strong global diversification;

--An asset-light business model with a largely variable cost structure due to the company's network of agents which generally own and operate the retail locations;

--Fitch's expectation that Western Union will achieve average annual organic revenue growth of approximately 10% over the next several years driven by growth in remittance transactions as well as incremental market share gains;

--Fitch's expectation that Western Union will maintain total adjusted leverage in the 2x-2.5x range and approximately 20% to 30% on a free cash flow basis.

Fitch believes Western Union's global scope and scale of operations is a significant competitive advantage. Fitch estimates Western Union's share of the international remittance market to be in the high-teen percentages, several times larger than its closest competitor. Western Union's 320,000-plus agent locations are also several times greater than its closest competitor. Geographically, 2006 revenue involving the U.S. market represented 40% of Western Union's total revenue and was the only market that was greater than 10% of total or segment revenue. This geographic split of revenue gives 50% credit each to the originating and receiving countries for a transaction. When looking at just the consumer-to-consumer business, to date in 2007, the U.S. concentrated portion of this segment (North America and Mexico) was only 22% of revenue, including transactions between and within the U.S. and Canada, and to and from Mexico. As Western Union continues to expand both its consumer-to-consumer and consumer-to-business segment internationally, geographic diversification should further increase. Due in part to the company's scale and global diversification, Fitch also expects Western Union to demonstrate strong stability in its free cash flow profile with free cash flow margin remaining near 20% over the next several years.

Credit concerns include:

--Event risk dominated by shareholder-friendly actions, as the ratings incorporate Fitch's expectation that Western Union will use the majority of its excess free cash flow for stock buybacks and acquisitions;

--Potential for higher capital spending requirements that Fitch believes would mostly arise from increased agent bonuses;

--Likelihood that the company will face increased competition from regional and multi-national banks entering the remittance market, although Western Union's relatively unique customer base could represent an asset to potential competitors looking to offer traditional financial services to migrant workers;

--Compliance risks associated with regulations governing Western Union's business in numerous jurisdictions worldwide;

--The risk of adverse political environments or legislation affecting migration flows, although this risk is mitigated by Western Union's broad geographic diversification.

Potential rating drivers which could impact the rating negatively include the potential for Western Union to increase its leverage targets to fund future acquisitions or shareholder-friendly actions. In addition, any lack of compliance with global regulations governing the remittance business could also negatively affect the rating. Positive rating actions could occur if Western Union gains significant market share, further distancing itself from existing or potential competitors, all while maintaining the current operating and financial profile and policies.

Liquidity as of Sept. 30, 2007 was solid with cash of $1.7 billion. Considering $275 million in outstanding CP, Western Union had approximately $1.2 billion available under the company's $1.5 billion senior unsecured revolving credit facility, expiring October 2012, which fully supports its $1.5 billion 4(2) CP program. In addition, free cash flow has averaged approximately $900 million annually for the past three years.

Total debt as of Sept. 30, 2007 was $3.3 billion and consisted of $275 million outstanding under Western Union's CP program, $500 million in senior unsecured floating-rate notes due November 2008, $1 billion in 5.4% senior unsecured notes due November 2011, $1 billion in 5.93% senior unsecured notes due September 2016, and $500 million in 6.2% senior unsecured notes due November 2036. Adjusted leverage (total adjusted debt/total operating EBITDAR) was 2.3x and interest coverage was 7.6x at the end of third-quarter 2007. Fitch expects Western Union will likely refinance the floating-rate notes due November 2008 at maturity in line with its objective of maintaining existing credit metrics.

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.