CME Refinances Debt, Prepays $421M - Analyst Blog

In the latest of its debt restructuring initiatives, yesterday CME Group Inc. (CME) announced a loan prepayment of $420.5 million under the three-year credit and term loan agreement that was due August 2011. This revolving facility has further been replaced with a $1 billion multi-currency three-year revolving credit agreement that will expire in January 2014.

CME is also expected to incur about $9 million of non-interest expenses in the fourth quarter of 2010, which would otherwise be sustained until August 2011. However, savings of about $3 million in interest costs is also projected from the prepayment of the three-year revolving loan.

While CME utilized its commercial paper and cash to fund the loan prepayment, it appointed Bank of America Corp. (BAC) as the administrative agent for the whole credit arrangement. Additionally, Merrill Lynch, Pierce, Fenner & Smith Inc., Barclays Capital of Barclays Plc (BCS), UBS Securities LLC of UBS AG (UBS), and Wells Fargo Securities LLC of Wells Fargo & Co. (WFC) were appointed as the joint lead arrangers.

Last month, CME had also entered into a credit revolving facility worth $1.0 billion in order to support its clearing house operations, which is on an expansion mode. The loan carries an interest rate of 1.25% above the federal rate for overnight loans, which floats in the range of zero to 0.25% since December 2008. The company was since trying to expand this loan size to $2.0 billion in near future.

CME is rigorously working to receive the credit line since the expansion of the company through acquisitions and reaching out to diverse markets warrants for keeping a back-up for any kind of contingencies. These eventualities include defaults from clearing house members and from money transfers, among others.

Moreover, operationally the company has been posting higher volumes that have been reflected in the last couple of quarters, but this growth consistency has to be supported by adequate funding in order to eliminate any operational risk.

Thus, despite a strong cash flow, an urgent requirement for additional source of funds justifies the latest revolving credit line receipt. However, the company's long-term debt stands at cautious levels and could put pressure on the financial leverage.

Additionally, CME is considerably exposed to interest rate volatility and rising competition, which again demand for strong capital requirements to better manage any fluctuations. Yet we believe that a gradual economic recovery and stable debt ratings are expected to drive volumes further. Moreover, the company's efforts to promote, expand and cross-sell its core exchange-traded business through meaningful acquisitions, a strong portfolio along with its global presence will generate a decent upside in the long run. 

On Thursday, the shares of CME closed at $313.60, down 0.4%, at Nasdaq Stock Exchange.