Fitch Rates Arch’s $450M Preferred Shares

September 27, 2016

Fitch Ratings has assigned a rating of ‘BBB+’/Rating Watch Negative to Arch Capital Group Ltd.’s [ACGL] $450 million issuance of 5.25% series E non-cumulative perpetual preferred shares.

The ratings agency said, “This new issue is rated equivalent to ACGL’s existing series C non-cumulative preferred shares. The net proceeds will be used to fund a portion of the cash consideration for ACGL’s acquisition of United Guaranty Corporation [UGC] from American International Group, Inc. [AIG], to pay related costs and expenses and for general corporate purposes.

“Fitch’s hybrid securities rating methodology allocates 100% of the preferred shares’ principal to equity in evaluating financial leverage. The offering is expected to close on Sept. 29, 2016 and is not contingent on the closing of the UGC acquisition, which is expected to close in either late fourth-quarter 2016 or early first-quarter 2017, subject to regulatory and government-sponsored enterprise [GSE] approval.

“The Negative Rating Watch on ACGL’s holding company ratings reflects increased financial leverage to finance the purchase of UGC. It also reflects Fitch’s anticipated change to a ‘ring-fencing’ environment classification for ACGL from a ‘group solvency’ approach following the purchase of UGC, as the acquisition is likely to increase the amount of capital outside of the Bermuda group solvency environment.

“Financial leverage pro forma for the purchase of UGC increases sizably from 11.9% at June 30, 2016 to approximately 20%-25% pro forma [depending on final Fitch equity credit]. The increase is due to an expected $1.125 billion in debt issued to partially finance the cash consideration for the acquisition.

“In addition, ACGL expects to issue $975 million of convertible non-voting perpetual preferred stock [either 100% or 50% equity credit depending on final terms] to AIG as stock consideration for the acquisition.”

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