S&P Places Marsh & McLennan on CreditWatch

December 29, 2006

Standard & Poor’s Ratings Services placed its ‘BBB/A-2’ counterparty credit rating on Marsh & McLennan Cos. (MMC) on CreditWatch with developing implications.

This action is in response to published news articles stating that the company has agreed in principle to sell its Putnam Investments (Putnam) unit. (Several months ago, MMC had publicly stated its intent to “do a market check to determine the value” of Putnam.) “Because of today’s articles and MMC’s earlier statement, we believe there is heightened potential that MMC might dispose of Putnam,” noted Standard & Poor’s credit analyst Steven Ader.

Although Standard & Poor’s does not view Putnam as an integral part of MMC, Putnam does provide a meaningful contribution to MMC’s earnings and revenue profile, with $217 million of operating income and $1.03 billion of revenue for the nine months ended Sept. 30, 2006, compared with $1.06 billion and $8.9 billion of consolidated operating income and revenue, respectively. Accordingly, the disposal of Putnam would diminish MMC’s prospective earnings profile both quantitatively as well as qualitatively through the loss of a diversified source of earnings and cash flow. Although Standard & Poor’s believes that management, if it were to dispose of Putnam, would apply a portion of the proceeds to reduce net outstanding debt, the amount of any prospective debt reduction is uncertain at this time.

The ratings could be raised if, upon the sale of Putnam, the proceeds were used to reduce debt, and incremental investments in existing lines of business more than offset the adverse quantitative and qualitative impact from the loss of Putnam’s earnings. Conversely, if an excessive amount of proceeds is applied toward share repurchase as opposed to debt reduction and prospective investments in business development, the ratings might be lowered.

The ratings on MMC are based on the company’s strong, though diminished, competitive position, led by Marsh Inc. (Marsh) and supplemented by the diversified operating profile of the Mercer Human Resource Consulting, Mercer Specialty Consulting, Putnam Investments (Putnam), Guy Carpenter, and Kroll Inc. (Kroll) operating subsidiaries. With the exception of Kroll (acquired in July 2004), these subsidiaries, led by Marsh, have traditionally supported MMC’s historically extremely strong operating profile. Offsetting these strengths are MMC’s financial leverage relative to operating performance, which is below that of the rating level.

Source: S&P

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