Standard & Poor’s Ratings Services said that its ratings on USI Holdings Corp. (BB-/Negative/–) were not affected by the company’s plans to raise $100 million under the accordion feature its existing credit facility. The company intends to use the proceeds to pay down some existing debt and to fund potential future acquisitions.
The increased borrowings will result in a senior secured credit facility totaling $385 million. Major terms, conditions and the maturity date of the expanded facility will remain unchanged.
Standard & Poor’s counterparty credit rating and bank loan ratings on USI are based on the company’s improved earnings profile and good revenue diversification. Offsetting the company’s strengths, according to Standard & Poor’s, and its rationale for maintaining the negative outlook, is the fact that the $100 million credit facility may once again place the company at the limits of its restrictive covenants due to increased financial leverage and reduced fixed charge coverage.
As of June 30, 2006, USI’s restrictive debt covenants require the company to maintain leverage below 3.0x as measured by total debt to pro forma EBITDA (adjusted for one time charges) and coverage of more than 2.0x as measured by pro forma EBITDA to fixed charges (interest expense plus scheduled principal payments). As of June 30, 2006, the company had a sufficient cushion based on reported EBITDA leverage and coverage measures of about 2.1x and 3.7x, respectively, according to Standard & Poor’s.
Although USI is currently in compliance with its debt covenants, the company has renegotiated and amended its debt covenants several times since 1999 to remain in compliance. In addition, the company remains under subpoena from various regulatory entities regarding contingent commissions. Offsetting Standard & Poor’s concerns are recent settlements that provide greater clarity about the near-term feasibility of contingent commission payments and the prospective fines that could be assessed. In the event that contingent commissions are eliminated from the company’s prospective revenue stream, Standard & Poor’s said it would immediately review its ratings on the company for a possible downgrade. Alternatively, the resolution of material litigation surrounding the potential loss of contingent commissions coupled with an improved financial profile, as measured by maintaining adjusted fixed charge coverage in excess of 3.5x, would likely cause Standard & Poor’s to revise its outlook to stable.
Source: Standard & Poor’s
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