S&P Rates Aon plc. Note Exchanges ‘BBB+’; Outlook Stable

December 14, 2012

Standard & Poor’s Ratings Services has assigned its ‘BBB+/A-2′ counterparty credit rating to Aon plc., and a ‘BBB+’ debt rating to AON’s proposed senior debt issue. “This is part of an offer whereby AON is exchanging a portion of its outstanding 8.205 percent junior subordinated deferrable-interest debentures due January 2027 into 30-year senior notes due 2042,” S&P explained. The new notes carry a guarantee form AON Corp.

“The rating on AON reflects the company’s strong competitive position arising from its well-established global presence in the risk-solutions business, supplemented by its global human-resources solutions segment,” stated credit analyst Neil Stein.

S&P indicated that the “company enhanced its market position in consulting and outsourcing with its October 2010 acquisition of Hewitt Associates Inc. AON was the world’s largest insurance broker in 2011, according to Business Insurance magazine, because of its organic growth and acquisitions. Other rating strengths include its appropriately managed leverage and cash flows, and credit metrics that are healthy for the rating and compare favorably with those of its global broker peers.”

S&P also pointed out that the “new senior debt issue does not change the amount of AON’s outstanding debt, its leverage, or its financial tolerance. In addition, issuing this bond helps AON reduce its refinancing risk, extends its maturity profile, and allows the company to take advantage of low interest rates.”

However, the report also indicates that the company is “susceptible to the depressed overall economic conditions and cyclical insurance pricing, which makes it difficult to achieve organic revenue growth and profitability.

“Another rating concern is the continued execution risk regarding AON’s strategic initiatives, restructuring plans, and new product initiatives. AON has incurred material charges related to these efforts each year since 2005. It has exposure to several significant lawsuits and could incur significant charges from underfunded pension liability issues. As of year-end 2011, AON contributed $477 million to its U.S. and international pension plans, but its pension plans remain underfunded by $1.82 billion.”

S&P said the stable outlook for the ratings reflects its “expectation that AON, through good earnings and prudent capital management, will continue to balance cash flows to debt at levels consistent with the rating. As a result of continued competitive pressures on property/casualty insurance rates, we believe organic growth will be minimal in the risk-solutions segment.”

“The HR solutions segment, however, could show signs of improvement as economic conditions improve. We believe these factors and AON’s restructuring programs should result in a pretax return on revenue (ROR) of at least 14 percent, adjusted fixed coverage of at least 5x, and an adjusted total obligations-to-adjusted EBITDA ratio of 3.5x or less,” the report continued.

In conclusion S&P said: “We could consider lowering the rating if its strategic initiatives and restructurings are not successful, the combined company does not realize projected synergies, additional acquisitions detract from operating performance or adjusted fixed-charge coverage deteriorates to less than 5x, the adjusted total obligations-to-adjusted EBITDA ratio rises to more than 3.5x, or ROR falls to less than 5 percent.

“We do not expect to raise our rating on AON in the next 12 months because its financial profile compares unfavorably with higher-rated companies. However, our view could be positively influenced by consistent improvement in AON’s financial profile, delivery of industry-leading margins, and significant reduction in pension liability while maintaining strong earnings.”

Source: Standard & Poor’s

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