S&P Announces Reaction to Recent MMC Developments

October 27, 2004

Following recent developments at Marsh & McLennan, Standard & Poor’s Ratings Services has issued a bulletin, which sets forth its initial reaction to the changes (See related articles).

S&P said its “BBB+/A-2” counterparty credit and senior debt ratings on Marsh (MMC) “will remain on CreditWatch negative following MMC’s Oct. 25, 2004, 8K filing of credit facility agreements and waiver agreements, the resignation of Jeffrey W. Greenberg as chairman and CEO of MMC, the appointment of Michael G. Cherkasky as President and CEO of MMC, the implementation of significant reforms in the business model of its Marsh Inc. (Marsh) subsidiary, and the appointment by the board of a lead director and a special committee to address regulatory matters.”

The CreditWatch update “also reflects the New York State Attorney General’s statement that ‘The actions announced by the Board of Directors of the Marsh & McLennan Cos. permits Marsh and this office to move forward toward a civil resolution of our lawsuit. This makes corporate criminal prosecution unnecessary.'”

In addition the rating agency indicated that “MMC’s obtaining of a waiver agreement effective through Dec. 30, 2004, on the outstanding credit facility agreements supporting the outstanding commercial paper balances ($2.1 billion as of Oct. 19, 2004)”, supports S&P’s view that MMC “has the resources and financial flexibility to manage its liquidity requirements.” S&P expressed confidence that “given the banks willingness to grant the waiver on a timely basis, “MMC will ultimately be “successful in securing a longer term financing arrangement in the immediate future.”

S&P also cited MMC’s statement that it plans to “announce significant reforms in its Marsh Inc. subsidiary that will be rooted in transparency and under which Marsh will receive compensation for its services from only one party; its clients,” as meaning it will permanently forego market service agreement (MSA) revenue.

“The ‘BBB+/A-2’ rating incorporates our belief that the market service agreements (MSA) suspension by Marsh was a permanent development reducing Marsh’s prospective revenue, income, and cash flow,” S&P said. “In 2003, MSA arrangements generated $845 million of incremental revenue, constituting 12 percent of risk and insurance revenue and 7 percent of consolidated revenue. Although the earnings and cash flow effect of this suspension is more readily definable in the short-term (an immediate correlation between revenue, earnings, and cash flow), the long-term effect, though material, is expected to be somewhat mitigated by expense control initiatives and potentially the replacement of some of the foregone revenue from insurance companies being replaced by client fee revenue. This effect is reflected in the rating.”

S&P also said the “BBB+/A-2” rating “incorporates our expectation that management would take appropriate action to negotiate a reasonable and timely settlement with the New York Attorney General to the extent that the previously mentioned changes at the company facilitates this process, Standard & Poor’s views this as a stabilizing development, though one previously incorporated into the rating.”

However, S&P recognized that its “rating also reflects that the Marsh franchise has, at least to some extent, been damaged by the allegations of bid rigging by the State of New York. This damage will be manifested in terms of potential fines and lost business. The rating reflects our expectation that the financial effect, as measured through adjusted fixed-charge coverage, incorporating the imputed interest on noncancelable leases will exceed 3.5x in 2005 and improve to more than 4x in 2006. In 2003, adjusted fixed-charge coverage was 6.8x.

“The CreditWatch with negative implications reflects the continued ongoing uncertainties of this evolving situation, particularly the effect on Marsh’s competitive position, earnings, and cash flow.”

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