S&P, Fitch Score Willis For Adding Debt

Concerns about the high debt levels Willis Group Holdings Ltd. will take on with its $2.1 billion purchase of Hilb Rogal & Hobbs insurance brokerage have led three rating firms to take negative actions against Willis.

Standard & Poor's Ratings Services said its concerns about Willis Group Holdings Ltd.'s addition of more than $1 billion in debt has led it to lower Willis' counterparty credit rating. S&P also said it lists the outlook on Willis as negative. The New York-based firm said it has dropped the counterparty rating to "triple-B-minus" from "triple-B."

Fitch Ratings, also in New York, said it has put Willis North America Inc. and Willis Group Holdings Ltd. on Rating Watch Negative. The firm said it expects to downgrade Willis and WNA's ratings at least one but not more than two notches following the transaction's expected closing during the fourth quarter of 2008.

Tuesday Moody's Investors Service said it placed the ratings of Willis Group Holdings Limited and its subsidiaries, including the Baa2 backed senior unsecured debt rating of

Willis North America Inc., under review for possible downgrade

Like the other rating firms Moody's noted positive aspects of the deal but said the acquisition will probably constrain Willis's profitability in the near term,

Tracy Dolin, S&P credit analyst, in a statement also cited concerns about the firm's returns in a market with declining rates and difficulties in integrating two companies. Fitch mentioned similar concerns.

To complete the transaction, Willis said it would 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. Willis has agreed to purchase all outstanding common shares of Hilb Rogal & Hobbs company.

Willis has announced that it intends to fund the transaction with 50 percent common stock and 50 percent cash, which will be funded with a combination of new $1 billion senior credit facilities and $1.25 billion bridge financing.

Fitch noted that Willis expects to repurchase the roughly $850 million of new equity issued within 12-to-18 months after the acquisition closes through a combination of free cash flow and incremental debt, which it said "will cause an additional strain on cash resources available to service Willis' existing debt."

S&P said it feels that management "is adopting a more aggressive debt servicing tolerance that does not support the 'triple-B' rating."

At the same time, Ms. Dolin said her firm believes the transaction will further solidify London-based Willis' "competitive market position and local presence in U.S. insurance brokerage."

The rating firm noted that 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, based in Richmond, Va., 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 said.

Willis is expected to successfully complete the transaction and achieve meaningful expense and revenue synergies, S&P said. However, citing increased market competition and decreased property-casualty insurance rates, S&P said it is anticipating minimal organic growth for the company.

"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 of 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," Ms. Dolin added.

She said S&P 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 firm's financial metrics.

The analyst said the outlook could also be revised to stable, subject to successful integration of HRH and S&P's gaining greater comfort that earnings and debt servicing capability will be maintained to support the "triple-B-minus" rating level.

Fitch said Willis' statements about increasing its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio are "well above Fitch's maximum comfort level" for insurance brokers at Willis' current rating level.

Willis' debt-to-total capital ratio, it said, is already high relative to other insurance brokers that Fitch rates and "is expected to increase from current levels in the high 40 percents."

Fitch also opined that Willis may be challenged to realize synergies from the transaction due to the softening insurance cycle.

Still, Fitch said it believes that Willis' insurance brokerage operations have outperformed those of its closest competitors for several years and that it will continue to do so in the near term.

Fitch also noted Willis' smaller size and comparative lack of business diversity relative to its larger global broker peers, and the effects of the property-casualty insurance industry's cyclical nature on Willis' earnings and cash flow.

This article updated June 11, 11:46 a.m.