Monday, January 11, 2010

Exchanges,The NASDAQ OMX

Debt Refi a Positive; Lower Amortization & Increased Flexibility

NDAQ bond and bank debt refinancing a positive; remain Overweight. In line with our expectations, NDAQ announced this morning that it will go to market with $700mm of senior notes, and enter into new senior unsecured credit facilities providing for up to $1.25B,
($1B funded term loan and $250mm unfunded revolver) to refinance its current bonds and credit facility.

This refinancing is positive for three reasons: 1) NDAQ’s previous credit agreement called for a
significant step-up in its bank debt amortization in 2011, to ~$164mm a quarter. New agreement will allow bank debt amortization payments to remain close to current levels of ~$56mm a quarter. 2) New credit agreement lifts restrictive covenants allowing NDAQ more flexibility
with regard to returning value to shareholders, potentially in the form of buybacks, dividends, etc. 3) Maturity on the term loan and bonds extended (though it will be at a modestly higher cost).

We remain Overweight. We still think NDAQ is cheap and key transactional revenue pressures have abated.
[morgan stanley]


Revising Estimates Reflecting December
Activity and Debt Offering

Ending the year on a mixed note. December was a mixed month for NASDAQ OMX. Seasonally slower U.S. cash equity market volumes were compounded by a step back in U.S. market share erosion. On the bright side, U.S. equity options remain healthy and market share increased to record levels; European volume trends were resilient.

3Q volume summary. Overall volumes came in somewhat better than expected. Matched U.S. cash equity volumes were lower (-36% yr/yr, -4% qtr/qtr)—market share improved quarter-to-quarter. U.S. options volumes remain a bright spot (+8%yr/yr, -3% qtr/qtr) as NDAQ continues to gain market share here. In Europe, cash equity vale traded declined (-12% yr/yr,
+16% qtr/qtr) given the past year’s market depreciation. OMX derivative volumes also declined (-5% yr/yr, +22% qtr/qtr).

Revising estimates. Factoring in final year-end activity and market share levels (U.S. options in particular), we are raising our 4Q09 EPS estimate to $0.43 (old: $0.41). Reflecting our estimate of this morning’s debt offering, we are reducing our 2010 EPS estimate to $1.95 (old: $2.00). We also initiate our 2011 estimate of $2.10. Our DCF-derived target price is $24—this implies that NDAQ shares can trade at 12x our 2010 EPS estimate.

Our Thesis on NDAQ. We are Neutral rated on NDAQ shares— while management execution and cost extraction remain on track, continued competitive headwinds in the U.S. and European cash equities markets dictate our Neutral rating.

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