Fitch Affirms Aon's Ratings; Outlook Stable
KEY RATING DRIVERS
The ratings affirmation reflects Aon's continued strong competitive position, balance sheet and cash flow generation, very good financial flexibility, and manageable financial leverage which are all within guidelines for the rating category.
Fitch believes Aon's liquidity profile is strong with cash and short-term investments of \\$783 million as of Sept. 30, 2015. Cash flow remains significant with earnings-based EBITDA interest coverage of roughly 9x for the period and averaging roughly 10x over the past five years. Through the first nine months of 2015, cash flow from operations increased by nearly \\$200 million to \\$1.1 billion compared to the same period last year, free cash flow (FCF; less capital expenditures) also grew, due primarily to reduced expenses. The company generated \\$1.6 billion of cash flow from operations for the full year 2014, following \\$1.6 billion in 2013 and \\$1.4 billion in 2012. Fitch notes that the fourth quarter is typically Aon's strongest cash flow generator.
Financial flexibility has been improving year over year. Interest coverage remains solid despite some earnings pressure and a temporary increase in interest expense from prefunded debt due in part to lower expenses including reduced pension liabilities and restructuring program expenses, and decreasing capital expenditures. Aon's merger and acquisition activity has remained below its typical levels following the Hewitt acquisition. Fitch expects Aon's financial flexibility to remain strong going forward.
Financial leverage as measured by debt-to-EBITDA temporarily increased from roughly 2.2x at March 31, 2015 to 2.5x at trailing 12 months (TTM) Sept. 30, 2015, due in part to prefunded debt, an increase in short-term debt to take advantage of share repurchase opportunities, and a reduction in EBITDA from one-time items and unfavorable foreign currency translation. Excluding unusual items, leverage is more in line with historical levels. Fitch expects financial leverage will likely decrease slightly by year-end 2015 with some debt repayment and anticipated earnings growth. Leverage will continue to be manageable and within both Fitch's expectations for the company and the broker-sector credit factor guidelines for the current rating category, with any debt increases being offset by growing EBITDA and increased cash flow.
Longer term, Fitch expects that leverage should remain relatively stable with some modest improvement, assuming continued EBITDA growth, and anticipated capital planning including share repurchases, which Fitch considers discretionary.
The new senior notes are fully and unconditionally guaranteed by Aon Corporation (Aon Corp.) and the ratings are therefore based on Aon Corp.'s existing Fitch 'BBB+' IDR. Net proceeds from this new issuance will be used for general corporate purposes including the refinancing of short-term commercial paper. Fitch views the debt favorably as the new senior debt was issued at an attractive rate of 2.8% and a longer-dated maturity, due in 2021, resulting in an improved liquidity profile with reduced near-term refinancing risk. Ultimately, Fitch does not expect any change to pro forma financial leverage, since the proceeds will likely be used to refinance existing debt.
The ratings continue to reflect Aon's favorable competitive position among the top three global brokers, with major operations in (re)insurance brokerage and human capital consulting/outsourcing. The company continues to demonstrate its ability to retain clients and expand new business while improving FCF and maintaining profitability.
Partially offsetting these positive factors are continued earnings pressure from pension liabilities, competitive insurance market conditions particularly in reinsurance, and the global economic downturn. Organic growth in the brokerage segment was on par with the peer average in 2014. Favorably, the company reported organic revenue growth in both the Risk Solutions and HR Solutions businesses in 2014 and through Sept. 30, 2015.
RATING SENSITIVITIES
The key rating triggers that could result in an upgrade include the following:
--A sustained strong improvement in operating performance on an absolute basis and relative to peers with operating EBIT consistently over \\$1 billion and an operating EBIT margin near 15%;
--A run-rate debt-to-EBITDA ratio less than 1.5x;
--Interest coverage as measured by an EBITDA-to-interest more than 12x.
The key rating triggers that could result in a downgrade include the following:
--A sustained increase in debt-to-EBITDA to more than 2.5x (adjusted for large one-time items) while maintaining an operating EBIT margin near 12%;
--A deterioration of the company's average EBITDA-to-interest expense to lower single digits;
--An impairment to goodwill that would materially impact the balance sheet and related ratios.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
Aon plc
--\\$400 million 2.8% senior debt due 2021 'BBB+'.
Fitch has affirmed the following ratings:
Aon plc
--IDR at 'BBB+';
--\\$350 million 4% senior debt due 2023 at 'BBB+';
--\\$600 million 3.5% senior debt due 2024 at 'BBB+';
--EUR500 million 2.875% senior debt due 2026 at 'BBB+';
--\\$256 million 4.25% senior debt due 2042 at 'BBB+';
--\\$250 million 4.45% senior debt due 2043 at 'BBB+';
--\\$550 million 4.6% senior debt due 2044 at 'BBB+';
--\\$600 million 4.75% senior debt due 2045 at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Aon Corporation
--IDR at 'BBB+';
--\\$500 million 3.125% senior debt due 2016 at 'BBB+';
--\\$600 million 5% senior debt due 2020 at 'BBB+';
--\\$521 million 8.205% junior subordinated deferrable interest debentures due 2027 at 'BBB-';
--\\$300 million 6.25% senior debt due 2040 at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Fitch has withdrawn the following rating:
Aon Services Luxembourg & Co S.C.A.
--IDR at 'BBB+'.
The Rating Outlook is Stable.
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