S&P Rates Aon’s Debt Issue ‘BBB+’

September 9, 2010

Standard & Poor’s Ratings Services has assigned its ‘BBB+’ senior debt rating to Aon Corp.’s three tranches of recently priced senior debt issues. S&P said it expects that Aon will use the net proceeds from the issues in lieu of drawing on its recently signed $1.5 billion bridge loan credit agreement and partly fund its $4.9 billion acquisition of global human resources consulting and outsourcing company Hewitt Associates Inc., which it announced on July 12, 2010. Moreover, we expect that the company will place the net proceeds in escrow until the transaction closes, which should be by mid November. Expected pro forma metrics are consistent with what we expect for the rating category.”

Credit analyst Neil Stein explained: “The ratings on Aon reflect the company’s strong competitive position, which stems from its well-established global presence in the risk and insurance brokerage industry and its globally positioned consulting segment.

Another rating strength is the company’s “appropriately managed leverage and cash flows; Aon’s credit metrics are healthy for the rating and compare favorably with those of its global broker peers,” S&P continued. “Additional positive factors that support the rating are the significant strides the company has made in expense control and revenue-enhancing initiatives, which we believe should continue to propel business and margin improvement.”

As offsetting factors S&P cited “the company’s susceptibility to the depressed economic climate and cyclical insurance pricing, which pressures organic revenue growth and profitability. The inherent execution risk and continued uncertainty regarding the ultimate success of strategic initiatives also constrains the rating. The potential for significant one-time charges from pending legal cases, reserve matters, restructuring, and pension liability issues is also a negative rating factor.

S&P said the stable outlook reflects “our expectation that Aon, through good earnings and prudent capital management, will continue to balance cash flows to debt at levels consistent with the rating. As a result of continued competitive pressures and decreased property/casualty insurance rates, we believe organic growth will be minimal to slightly negative in the risk and insurance brokerage segments.

“The consulting segment, however, will show signs of improvement, largely because of the acquisition. The company should increase its efficiency through the completion of its Benfield integration efforts, the commencement of its Hewitt integration, and revised restructuring programs, resulting in a pretax return on revenue of at least 14 percent.

“We could consider a negative rating action if the integration process with Hewitt does not succeed, the combined company does not realize projected synergies, and the acquisition detracts from operating performance. We could also consider a downgrade if adjusted fixed-charge coverage deteriorates to less than 5x or if outstanding legal disputes affect Aon’s financial or competitive profile. Positive rating movement is unlikely for at least two years because of uncertainties with short-term integration and execution risks.

Source: Standard & Poor’s

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