S&P Changes Willis Group Outlook to Positive; Affirms Ratings

September 2, 2011

Standard & Poor’s Ratings Services has revised its outlook on Ireland-domiciled Willis Group Holdings PLC to positive from stable, and has affirmed its ‘BBB-‘ long-term counterparty credit rating on Willis and related ratings on debt issues outstanding.

“The positive outlook reflects Standard & Poor’s view that Willis has demonstrated a more disciplined financial risk tolerance relative to a few years ago,” explained credit analyst Hardeep Manku. “This has yielded more stable debt levels and improved leverage and coverage metrics,” he added.

S&P noted that as of June 30, 2011, “debt-to-adjusted EBITDA and adjusted EBITDA fixed charge coverage were about 2.5x and 6.2x, respectively, as compared with peaks of about 3.9x and 4.6x, respectively, in 2008. We believe management will continue to proactively manage its financial profile with tighter control over cash flows and capital expenditure including discretionary spending.”

S&P explained that the positive outlook “also reflects Willis’ strides in recognizing greater efficiencies from execution of its strategic and operational initiatives to drive organic revenue growth and improve profitability. We believe this could further enhance its competitive position and allow Willis to maintain its industry-leading margins with associated positive impact on financial metrics. Overall, an improved financial profile, strong operating performance, and good competitive position could potentially support a higher rating.

“The counterparty credit rating on Willis is based on the company’s good and enhanced market position, especially in the U.S. following the Hilb, Rogal & Hobbs (HRH) acquisition in 2008; Willis’ strong sales culture, enforced by strong management, which helps steer its proven organic growth platform; and strong, peer-leading operating margins.

“Partially offsetting these strengths are the company’s lack of earnings diversification relative to those of its global broker peers, lending it to greater susceptibility to underwriting cycles; improving-but-still highly leveraged financial profile; potential regulatory and litigation risks; and execution risks related to its strategic and operational initiatives.”

S&P said it “expects low-single-digit organic growth in 2011 and 2012 despite adverse economic conditions and lower property/casualty insurance rates helped by expansion in international markets and fine tuned sales strategy to drive better market penetration. We believe Willis will support earnings through its continued attention to the bottom line, resulting in adjusted EBITDA margins that will likely be at or above 25 percent.”

In the future S&P said it “could raise the rating by one notch within next 12-24 months if Willis’ financial profile continues to improve as a result of disciplined financial risk tolerance as demonstrated by maintenance, on a consistent basis, of debt to adjusted EBITDA of 2.5x or lower and adjusted EBITDA fixed-charge coverage of greater than 5.5x and successful execution of its revenue and expense initiatives.”

In addition the report explained that a positive outlook “indicates that there is at least a one-in-three likelihood of an upgrade. However, Willis’ increased use of debt leverage as well as general operational, legal, and regulatory risks could potentially constrain any positive rating action.

“The ratings could be pressured if, in our view, Willis’ competitive position weakens because of erosion in its market share or brand recognition due to any reason including execution risk from strategic initiatives; if financial risk tolerance increases materially leading to an increase in debt leverage beyond our expectations (debt-to-adjusted EBITDA increases to about 3.0x or higher and/or adjusted EBITDA fixed charge coverage deteriorates to less than 4.0x); if liquidity is constrained materially; or if the operating performance deteriorates resulting in margin compression with no near-term outlook for improvement. Further pressure on ratings could result if regulatory or legal risks amplify, such as material adverse settlements putting pressure on either Willis’ business or financial profile.”

Source: Standard & Poor’s

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