Fitch Downgrades Senior Debt for Marsh & McLennan

December 21, 2004

Fitch Ratings has downgraded the senior debt rating on Marsh & McLennan Companies Inc. (MMC) to ‘BBB-‘ from ‘BBB’. Marsh’s long-term and short-term ratings remain at ‘BBB’ and ‘F2’, respectively. All ratings remain on Rating Watch Negative pending resolution of all material matters related to recent suits brought about by New York Attorney General Eliot Spitzer and the outcome of Marsh’s new business model and operating profile.

Monday’s rating action follows Fitch’s review of Marsh’s Form 8-K filed Dec. 15, which discloses final credit agreements for new and amended bank facilities. A material degree of subordination of the existing unsecured senior debt securities relative to the bank debt now is believed to exist due to an ‘unconditional guarantee’ provided to the banks by the three primary operating companies Marsh Inc., Putnam Investments Trust, and Mercer Inc.

Fitch views Marsh’s ability to restructure and extend its bank credit facilities positively for Marsh’s short-term financial position, since the commitments allow Marsh to avert near-term liquidity situations that could have called ongoing viability into question and provide a longer term stable operating environment.

On Dec. 15, Marsh executed final credit agreements for $3 billion in unsecured bank loans consisting of a $1.3 billion two-year term loan ($300 million more than preliminary terms indicated), a $1 billion three-year revolver, and a $700 million five-year revolver. The facilities replace, in part, existing facilities that were set to start expiring next year. All facilities are to support general corporate purposes.

Fitch has lowered Marsh’s senior debt rating five notches and commercial paper rating one notch since the announced civil suit brought against the company by the New York Attorney General and allegations of collusion and price rigging. Regardless of the ultimate outcome of the suits, Fitch believes that Marsh will suffer a material decline in its franchise value as a result of the allegations, especially given recent reputation issues suffered in its Putnam mutual fund unit, tied to improper trading practices.

All ratings remain on Rating Watch Negative due to the fact that significant uncertainties still exist as to the ultimate magnitude of outcomes from the Spitzer lawsuit and changes in the broker operating environment.

Fitch believes that there is a fundamental change in Marsh’s operating profile in which the company will fade from a superb profit generator and that Marsh’s pretax brokerage margins could drop from 24%-28% historically to as low as 12%-15% over the next 18 months.

Topics Marsh McLennan

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