S&P Lowers Willis Ratings to ‘BBB-‘; Outlook Negative

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on Willis Group Holdings Ltd. to ‘BBB-‘ from ‘BBB’ following the recent announcement that it will acquire Richmond, Va.-based insurance broker Hilb Rogal & Hobbs (HRH) for a total purchase price of $2.1 billion. (See IJ web site – https://www.insurancejournal.com/news/national/2008/06/09/90764.htm). S&P has also assigned the ratings a negative outlook.

“We believe that the transaction will further solidify Willis’ competitive market position and local presence in U.S. insurance brokerage,” stated credit analyst Tracy Dolin. “However, Willis intends to increase its usage of debt, thus further leveraging the company.”

Willis, the third-largest insurance broker in the U.S., generated $2.6 billion in revenue in 2007 and $795 million in the first three months of 2008. HRH, now the eighth-largest U.S. insurance broker, will further diversify and strengthen Willis’ business platform and constitute about 25 percent of the combined group’s revenue.

S&P explained that to “complete the transaction, Willis intends to assume and refinance $400 million of existing HRH debt and raise up to $1.4 billion in additional debt. It will use some debt proceeds for share repurchase.” As a result S&P said it has come to the conclusion that “management is adopting a more aggressive debt servicing tolerance that does not support the ‘BBB’ rating.”

However, the rating agency also indicated that it “expects that Willis will successfully complete the transaction and achieve meaningful expense and revenue synergies. Because of increased market competition and decreased property/casualty insurance rates, Standard & Poor’s anticipates minimal organic growth.”

Dolin indicated the “negative outlook reflects our concern–at least in the short term–about the acceptance of a much greater debt servicing requirement in conjunction with an acquisition in the face soft market conditions, integration risk including achieving expense and revenue synergies, the ability to offset HRH’s contingent commissions which will be phased out, and some uncertainty about the actual use of anticipated free cash flow.”

S&P said it could “lower the rating again over the next 24 months if challenges were to emerge in integrating HRH with expected expense and revenue synergies or if market conditions or management decisions result in greater-than-anticipated pressure on the financial metrics noted above.”

However S&P also indicated that it “could revise the outlook to stable subject to successful integration of HRH,” and if it gains “greater comfort that earnings and debt servicing capability will be maintained to support the ‘BBB-‘ rating level.”

Source: Standard & Poor’s – www.standardandpoors.com