Moody’s Investors Service has affirmed Marsh & McLennan Companies’ (MMC) Baa1 senior unsecured debt and P-2 commercial paper ratings following the group’s agreement to acquire insurance broker Jardine Lloyd Thompson Group (JLT).
MMC’s rating outlook has been downgraded from stable to negative based on the expected increase in financial leverage and the execution risk associated with acquiring JLT.
It was announced on Tuesday that MMC would acquire JLT in a deal worth $5.6 million as part of the group’s strategy to become the preeminent global firm in the areas of risk, strategy, and people.
The transaction is expected to be completed in the spring of 2019, pending approvals from regulators and JLT shareholders.
According to Moody’s, the acquisition is strategically sound but credit negative based on the expected increase in debt and the execution risk.
Marsh agrees to acquire JLT
The acquisition of JLT will boost the group revenue of MMC, which is the world’s largest insurance brokerage and consulting firm by revenue, by about 13 percent and will enhance the group’s capabilities in multiple industry specialities including energy, mining, healthcare, construction, marine, and aerospace. Additionally, it will expand the group’s presence in reinsurance brokerage.
The ratings agency suggested that these benefits are offset the significant debt taken on to help fund the acquisition.
Moody’s estimates MMC’s debt-to-EBITDA ratio to rise above 4x when the transaction is completed, well above the group’s historic leverage of 2.6x to 2.8x, while interest coverage will decline from the high single digits toward the mid-single digits.
The deal also includes execution risk for MMC, including potential attrition among producers and clients.
Moody’s notes that JLT has weaker profit margins that MMC, which the group aims to improve through integration and cost savings.
The negative rating outlook is driven by these elevated risks, however, Moody’s predicts that MMC will reduce its financial leverage toward its historical levels through a combination of debt repayment and EBITDA growth over the 12 to 18 months following the acquisition.
MMC has said such deleveraging will be supported by slowing of its share repurchases and other acquisitions.
The ratings are reflective of MMC’s global market presence; diversification across clients, products and regions; expertise in providing complex risk and human resource to global, national and middle market accounts; and long record of profitable growth.
These strengths are tempered by the group’s financial leverage, which has been at the high end of the range for its rating category, its exposure to fluctuating pension obligations, and its potential liabilities arising from errors and omissions in the delivery of professional services.
There are a number of factors identified by Moody’s that could lead to a stable rating outlook for MMC, including: smooth integration of JLT and MMC with continued profitable growth, reduction of debt-to-EBITDA ratio below 3.2x following the acquisition, (EBITDA–capex) coverage of interest remaining in the mid-single digits or higher, and net profit margin remaining in the high single digits or higher.
However, the following factors could lead a downgrade in rating: debt-to-EBITDA ratio above 3.2x on a sustained basis, (EBITDA–capex) coverage of interest below 5x, or net profit margin below 8 percent.
Moody’s has also assigned provisional ratings to MMC’s new shelf registration: senior unsecured shelf at (P)Baa1, and subordinated shelf at (P)Baa2.
