Standard & Poor’s Ratings Services said that it is taking no rating action on Marsh & McLennan Companies (BBB/Negative/A-2) following the firm’s decision to, as MMC phrased it, “do a market check to determine the value” of its Putnam Investments unit.”
S&P said it believes this implies that MMC is considering a transaction involving Putnam, including a potential sale.
S&P said that although it does not view Putnam as an integral part of MMC, Putnam does provide a meaningful contribution to MMC’s earnings profile, constituting 11.4 percent and 19.0 percent of MMC’s consolidated revenue and earnings, respectively, as of June 30, 2006. Accordingly, the rating agency said that any prospective rating action relative to the sale of Putnam would weigh the sale proceeds and Putnam’s prospective earnings and cash-flow profile.
S&P’s current counterparty credit rating on MMC is based on the “company’s strong, though markedly diminished, competitive position,” led by Marsh Inc. and supplemented by the diversified operating profiles of the Mercer Inc., Putnam Investments, Guy Carpenter, and Kroll Inc. operating subsidiaries. These subsidiaries have traditionally supported MMC’s historically extremely strong operating profile, according to S&P.
However, S&P noted, offsetting these strengths are the “material competitive and operational uncertainties resulting from the implementation of management’s new business model, which addresses the elimination of contingent commissions.” This meaningful loss of revenue and earnings stems from settlements with the New York Attorney General and Superintendent of Insurance related to allegations of bid rigging and other anticompetitive actions. As such, S&P said it prospective view of MMC’s financial profile is dependent on the recovery of Marsh Inc.’s market share, as supported by positive organic growth.
Although MMC’s financial flexibility has materially improved in 2005, as demonstrated by the September 2005 public issuance of $1.3 billion in medium-term senior debt and the $475 million refinancing of its headquarters facility, it remains a weakness to the S&P rating.
S&P added that MMC is faced with the challenge of rebalancing its financial leverage (year-end 2005 adjusted fixed-charge coverage of 2.0x) with a diminished competitive and operating profile.
Source: Standard & Poor’s
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