Standard & Poor’s Ratings Services has assigned its “B” counterparty credit rating to Hub International Ltd. with a stable outlook. S&P also assigned its “B” senior secured debt rating to Hub’s proposed $775 million of senior secured credit facilities, which consist of a $675 million term loan B and a $100 million revolver. Finally the rating agency assigned its “CCC+” senior unsecured debt rating to Hub’s proposed $395 million senior unsecured notes as well as Hub’s proposed $395 million senior subordinated note issuances.
The proceeds will be used to finance a proposed $1.9 billion acquisition of Hub by a group of private investors led by APAX Partners. The transaction is being capitalized with $1.325 billion of debt and about $663 million of equity.
“The ratings on Hub reflect its significantly deteriorated financial flexibility following the proposed issuance of debt to finance the acquisition,” explained S&P credit analyst Julie Herman. “They also reflect Hub’s low-quality balance sheet because of large amounts of goodwill and intangibles.”
S&P also said the comparatively low ratings were “based on Hub’s rapid acquisition strategy that, though disciplined, poses inherent execution risks and decentralized organizational structure, which has resulted in challenges to fully realizing potential synergies or maximizing operational efficiency.”
However, the rating agency also noted that Hub has been consistently successful in “enhancing its competitive scale and geographic footprint.” It also has a “consistent history of healthy operating results and cash flow, and good earnings diversification within the brokerage segment.”
S&P said it “views Hub’s acquisition strategy favorably and believes that Hub’s disciplined approach to acquisitions has enabled the company to have consistent profitability while sustaining rapid growth.” However, the “inherent execution risks associated with an acquisition strategy, especially such a rapid one, as the company has acquired approximately 135 brokerages since inception,” continue to be of concern.
The brokerage firm’s history of success, based on its “decentralized structure and the entrepreneurial nature of its hub brokerages, nonetheless pose “challenges in maximizing operational efficiency and fully realizing potential synergies between the hubs. S&P would like to see “increased coordination of the company’s hub brokerages” in order to “fully leverage the scale it has achieved since inception.”
Hub’s management has “demonstrated a successful track record,” S&P continued, having built up the Group through acquisitions and “significantly expanding its scale of operations. It has “increased its revenue to $543.9 million in 2006 from $38.7 million at the company’s start in 1998, transforming it from a small Canadian brokerage operation to a leading middle-market player in the U.S. brokerage space,” said S&P. “It also achieved “positive organic growth of 2.8 percent in 2006, attributable in part to a continued sales focus.” In addition, the company has maintained healthy cash flows from operations because of its highly cash generative business model, with $96.6 million of operating cash flows in 2006.
S&P concluded that Hub’s “ability to offer a varied menu of products to its clientele further enhances its competitive position, as does the protection its diversification affords from the cyclical nature of the property/casualty sector, particularly in light of the current challenging rate environment.
“If the company’s interest-coverage and debt-leverage metrics fall short of our expectations, the outlook or ratings could be revised downward, particularly if the deterioration results from an unsuccessful execution of its acquisition strategy. If the company is able to improve its financial profile materially such that these metrics exceed our expectations significantly, Standard & Poor’s will consider revising the outlook to
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