recent acquisition spree has cost it an investment-grade credit rating.
Standard & Poor's cut the exchange operator's debt rating to junk Tuesday, a week after the company used borrowed money to help finance a growing stake in the London Stock Exchange. S&P lowered the Nasdaq's long-term counterparty rating to BB+ from BBB-, the top rung of its speculative-grade hierarchy.
"The credit rating downgrade is a function of Nasdaq's high debt leverage, resulting primarily from its acquisition of the INET platform in 2005, and, more recently, its purchase of a 24.1% stake in the London Stock Exchange," the report from analyst Charles Rauch said. "Currently, ratings reflect our expectation that Nasdaq will continue to employ debt, bank loans, and/or available on-balance-sheet liquidity to further increase its stake in the LSE."
Last Wednesday, the Nasdaq announced that it had spent $320 million to acquire 13.8 million shares of the LSE from other shareholders, bringing its overall holding in the London company to 24.1%. In a filing with the
Securities and Exchange Commission
, the Nasdaq said the most recent purchases were bought with "$310.1 million of funds available under our April 2006 credit facility and $10.6 million from cash on hand."
The S&P downgrade could be an issue if the Nasdaq wants to add significantly to its LSE position. The company tried and failed to buy the exchange once, and might be building its current position with an eye toward an eventual takeover. Still, questions remain about how it would pay for such a deal. The Nasdaq received a $1.92 billion credit facility from
Bank of America
to purchase its initial 15% stake in the LSE, then paid off part of that after completing an equity offering. Last week's filing is the first time the company has disclosed using debt since it started building its LSE stake.
Market sources have told
that they expect the company will tap private equity capital to increase its LSE stake, similar to when it acquired Instinet with Silver Lake and Hellman & Friedman.