Standard & Poor’s has placed its ratings on Aon Corp., including its
single-‘A’-minus counterparty credit rating, on CreditWatch with negative implications following the company’s third-quarter earnings announcement, in which Aon said that it intends to raise $500 million of equity capital to shore up its balance sheet and up to $500 million in longer-term debt instruments to address short-term liquidity needs.
Standard & Poor’s had previously met with management to discuss these issues and is comfortable that upon completion of its capital-raising initiatives, Aon’s balance sheet and liquidity position will be supportive of the current rating.
“There is some concern, however, that the company could have difficulty raising the indicated level of funds in the current market environment because of the recent performance issues with its insurance brokerage operations and the funding status of its off-balance-sheet pension liabilities, which range between $450 million and $550 million,” noted Standard & Poor’s credit analyst Matthew Coyle. (A combination of these issues has caused Aon’s common equity and debt obligations to trade at a discount as compared with historical levels).
If the company cannot raise an appropriate level of funds in the short
term, Standard & Poor’s will lower the ratings. Conversely, Standard & Poor’s will affirm the current ratings and assign a stable outlook if the company can successfully raise the necessary funds. Another important consideration is the form of funds raised. Standard & Poor’s expects the proceeds from any offering to reduce Aon’s leverage and reliance on short-term funding instruments, such as commercial paper and bank lines. By implication, a large proportion of the funds raised is expected to be in the form of common equity.
As of Sept. 30, 2002, Aon’s total outstanding debt–including preferred obligations – was about $2.9 billion, which equates to financial leverage (debt plus preferred as a % of capital) of about 45%. Almost $700 million of Aon’s outstanding obligations are in the form of commercial paper borrowings.
Regarding Aon’s insurance brokerage operations, Standard & Poor’s expects a meaningful improvement in operating margins in subsequent quarters. In the third quarter, margins in the insurance brokerage segment improved slightly but still lagged that of its relevant peer group. Although Standard & Poor’s expects results in this area to improve progressively each quarter, the company’s results are unlikely to achieve margins consistent with its peer group until late 2003 or early 2004.
Notwithstanding, Standard & Poor’s believes Aon holds a unique position in the worldwide insurance brokerage market and should benefit from what is now being referred to as the best
insurance market of the last 10 years.
The lack of resolution on the sale or spin-off of the underwriting
operations is believed to be a distraction to management but also a potential opportunity to raise funds.