S&P Puts ‘the Pru’ on CreditWatch / Negative on AIA Acquisition

March 2, 2010

Standard & Poor’s Ratings Services has placed its ratings on Prudential PLC and its operating subsidiaries, including the ‘A+’ long-term counterparty credit rating on Prudential, on CreditWatch with negative implications.

S&P’s action follows the announcement that Prudential has reached an agreement with American International Group Inc. to acquire an AIG subsidiary, AIA Group Ltd., including AIA Group’s subsidiary, American International Assurance Co. Ltd. [See IJ web site – https://www.insurancejournal.com/news/national/2010/02/28/107733.htm ]

S&P did note, however, that “Prudential announced its results for 2009, which were better than our expectations.”

Credit analyst Mark Button explained: “We have placed our ratings on Prudential on CreditWatch negative because of the size and weaker credit profile of AIA relative to Prudential and to reflect our view that the transaction likely will have a material adverse impact on Prudential’s key credit metrics, such as capitalization and fixed-charge coverage. We also believe the transaction carries significant execution risks.”

Prudential will fund the $35.5 billion transaction through a substantial underwritten rights issue to existing Prudential shareholders ($20 billion), underwritten senior debt issuance ($5 billion), and various securities issued to AIG ($10.5 billion), including shares. “We expect the transaction to significantly increase financial leverage and reduce IFRS fixed-charge coverage to levels below expectations embedded in the current ratings,” said S&P. “We also expect that the significant amount of intangibles that Prudential will acquire will put pressure on capital adequacy.”

In addition the rating agency pointed out that the “transaction will transform Prudential’s size and profile, significantly enhancing its presence in numerous growth markets across Asia. It will also dilute one of the key rating strengths of the group, namely the contribution from the U.K.

“Based on current information, we believe the most likely outcome of the resolution of the CreditWatch is that we lower our ratings on Prudential and its subsidiaries and assign a negative outlook. We consider it unlikely that we would lower our ratings by more than two notches. We expect to resolve the CreditWatch upon the completion of the transaction, which likely will occur in the third quarter of 2010, and we intend to update our analysis in the meantime.”

Source: Standard & Poor’s – www.standardandpoors.com

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