Fitch Places MMC On Rating Watch Negative

September 21, 2018

Fitch Ratings has placed the ratings of Marsh & McLennan Companies, Inc. [MMC] on Rating Watch Negative. This includes the ‘A’ Long-Term Issuer Default Rating [IDR] and senior unsecured debt ratings and ‘F1′ Short-term ratings.

The ratings agency said, “Fitch’s rating action follows the announcement that MMC has reached an agreement to acquire Jardine Lloyd Thompson Group plc [LSE: JLT] for 19.15 pounds sterling per share, a 33.7% premium to JLT’s closing stock price as of Sept. 17, 2018. Total cash consideration equates to roughly $5.6 billion in fully diluted equity value, or an estimated enterprise value of $6.4 billion.

“The transaction will be funded with cash on hand and proceeds from future debt financing. MMC currently has bridge loan financing in place as required by the U.K. The transaction is expected to close in the spring of 2019.

“The Rating Watch Negative reflects the expected increase in near-term debt and related increase to financial leverage as measured by debt to EBITDA, above levels acceptable for the current rating category. Increased debt will also result in lower interest coverage. Fitch’s Rating Sensitivities for a downgrade will be met for these key factors.

“The rating action also reflects the inherent execution risk and longer-term integration risk associated with a transaction of this size, which is larger than what Fitch perceived to be MMC’s acquisition appetite. These risks include uncertainty tied to realizing anticipated expense savings and retaining key employee and clients going forward.

“The Rating Watch will be resolved, and Fitch expects to downgrade MMC’s ratings by one notch to ‘A-’ with a Negative Outlook, upon completion of the transaction-related debt financing. The Negative Outlook will reflect the longer-term acquisition integration risk as well as the continued near-term elevated debt level and the effect on associated financial ratios.

“Fitch estimates that the all-debt funded transaction and relatively high debt utilization at JLT fosters considerably higher pro-forma financial leverage for the combined entity at roughly 3.0x relative to MMC’s current annualized debt to EBITDA of roughly 1.6x at June 30, 2018. However, ultimate long-term capital management plans and tolerance for debt leverage are likely to be at a lower level. A return to debt to EBITDA ratios at consistently near 2.0x would be viewed positively in the rating assessment.

“Fitch expects that financial leverage will gradually decrease following the acquisition over the next one to three years from continued EBITDA growth, projected expense savings of $250 million related to the acquisition, and anticipated debt repayment. Fitch also believes the company will reduce leverage to return to a run-rate level closer to 2.0x – 2.25x by the end of 2020 and would likely pay off a portion of existing debt in order to do so if EBITDA growth does not meet expectations. In the near term, leverage is manageable and interest coverage from earnings and cash flow is sufficient to meet obligations.

“In the long term, MMC’s acquisition of JLT should result in positive business and operational synergies. The transaction creates a larger, more diverse entity with complimentary operating franchises in specialty insurance and reinsurance brokerage, and employee benefits consulting services. The acquisition expands MMC’s international profile with JLT’s existing presence in the U.K., Asia, and other emerging markets.

“MMC’s ratings continue to reflect the company’s strong financial flexibility and liquidity profile with excellent operating performance and cash flow generation, and favorable top-tier competitive position as the largest global insurance brokers, with positive organic growth and an EBITDA margin of 26% at June 30, 2018 that remains in line with the company’s closest peers.”

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