Moody’s Changes Debt Ratings of Insurance Brokers & Service Cos.

February 8, 2012

Moody’s Investors Service has changed various debt ratings of insurance brokers and service companies based on the application of its loss given default (LGD) framework to guide notching decisions for speculative-grade issuers. The LGD framework was incorporated into Moody’s Global Rating Methodology for Insurance Brokers & Service Companies through an update to the methodology published on February 3.

“The LGD framework helps us to more consistently estimate potential losses and recoveries on obligations of below-investment-grade issuers,” said Moody’s Vice President and Senior Credit Officer Bruce Ballentine. “The range of instrument ratings around the corporate family rating is generally wider under LGD than under the more qualitative notching practices used in the prior methodology.” The LGD-related rating actions, listed below, include one-notch upgrades of certain senior secured debt obligations and one-notch downgrades of certain lower-tier obligations.

Moody’s noted that the insurance brokerage methodology mainly helps to explain senior debt ratings of investment-grade issuers and corporate family ratings (CFRs) of speculative-grade firms, and these ratings have not been affected by the recent update. That is because the new methodology maintains the same key rating factors, credit metrics, rating level guidelines and factor weightings as in the prior version.

The most significant change to the methodology has been the incorporation of the LGD framework. This framework, which is well established for non-financial speculative-grade firms, encompasses probability of default ratings (PDRs) for each corporate family and LGD assessments for each rated obligation. PDRs address the likelihood that any entity within the corporate family will default on one of its debt obligations, without any consideration of the expected LGD. LGD assessments provide an indication of expected loss severity in the event of a default. Taken together, CFRs, PDRs and LGD assessments inform Moody’s instrument ratings.

LGD assessments are expressed through a six-point scale (LGD1 through LGD6) that orders expected loss severity from lowest to highest. In addition, Moody’s provides the whole percentage point estimate (commonly referred to as the “LGD point estimate” or “LGD rate”) for each rated obligation.

The LGD-related rating actions (and LGD assessments) are as follows:

Alliant Holdings Inc. (Alliant)

  • Corporate family rating unchanged at B3
  • Probability of default rating assigned at B3
  • Senior secured revolving credit facility unchanged at B2, LGD assessment assigned at (LGD3, 33%)
  • Senior secured term loan unchanged at B2, LGD assessment assigned at (LGD3, 33%)
  • Senior unsecured notes downgraded to Caa2 (LGD5, 87%) from Caa1.
  • The rating outlook for Alliant is stable.
  • Factors that could lead to an upgrade of Alliant’s ratings include (i) adjusted (EBITDA – capex) coverage of interest exceeding 2x, (ii) adjusted free-cash-flow-to-debt ratio exceeding 5%, and (iii) adjusted debt-to-EBITDA ratio below 5.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.2x, (ii) adjusted free-cash-flow-to-debt ratio below 2%, or (iii) adjusted debt-to-EBITDA ratio exceeding 8x.

AmWins Group Inc. (AmWINS)

  • Corporate family rating unchanged at B2
  • Probability of default rating assigned at B2
  • First-lien revolving credit facility upgraded to B1 (LGD3, 38%) from B2
  • First-lien term loan upgraded to B1 (LGD3, 38%) from B2
  • Second-lien term loan downgraded to Caa1 (LGD5, 89%) from B3
  • The rating outlook for AmWINS is stable.
  • Factors that could lead to an upgrade of AmWINS’ ratings include (i) adjusted (EBITDA – capex) coverage of interest consistently above 2.5x, (ii) adjusted free-cash-flow-to-debt ratio exceeding 6%, and (iii) adjusted debt-to-EBITDA ratio below 4.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.5x, (ii) adjusted free-cash-flow-to-debt ratio below 3%, or (iii) adjusted debt-to-EBITDA ratio above 6.5x.

C.G. JCF Corp. (Crump Group)

  • Corporate family rating unchanged at B2
  • Probability of default rating assigned at B3
  • Senior secured revolving credit facility unchanged at B2, LGD assessment assigned at (LGD3, 32%)
  • Senior secured term loan unchanged at B2, LGD assessment assigned at (LGD3, 32%)
  • The rating outlook for Crump Group is stable.
  • Factors that could lead to an upgrade of Crump Group’s ratings include (i) adjusted (EBITDA – capex) coverage of interest remaining above 2.5x, (ii) adjusted free-cash-flow-to-debt ratio consistently above 6%, and (iii) adjusted debt-to-EBITDA ratio below 4.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.5x, (ii) adjusted debt-to-EBITDA ratio above 6.5x, or (iii) a reduction in support from the private equity sponsor.
  • On February 3, BB&T Corp. (NYSE: BBT) announced an agreement to acquire Crump Group’s life and property & casualty insurance divisions for $570 million in cash. The transaction is expected to close in the first quarter of 2012, subject to regulatory approval. Moody’s anticipates that Crump Group’s credit facilities (outstanding principal balance of $230 million at year-end 2011) will be repaid and terminated upon the closing of the acquisition, at which point the ratings would be withdrawn.

HMSC Corp. (HMSC)

  • Corporate family rating unchanged at B3
  • Probability of default rating assigned at B3
  • First-lien revolving credit facility upgraded to B2 (LGD3, 34%) from B3
  • First-lien term loan upgraded to B2 (LGD3, 34%) from B3
  • Second-lien term loan downgraded to Caa2 (LGD5, 87%) from Caa1
  • The rating outlook for HMSC is stable.
  • Factors that could lead to an upgrade of HMSC’s ratings include (i) adjusted (EBITDA – capex) coverage of interest exceeding 2x, (ii) adjusted free-cash-flow-to-debt ratio exceeding 5%, and (iii) adjusted debt-to-EBITDA ratio below 5.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.2x, (ii) adjusted free-cash-flow-to-debt ratio below 2%, (iii) cash and equivalent balances amounting to less than one year’s interest expense, or (iv) a separation from Cooper Gay (Holdings) Ltd.

Hub International Limited (Hub)

  • Corporate family rating unchanged at B3
  • Probability of default rating assigned at B3
  • Senior secured revolving credit facility upgraded to B1 (LGD2, 26%) from B2
  • Senior secured term loan upgraded to B1 (LGD2, 26%) from B2
  • Senior unsecured notes downgraded to Caa1 (LGD5, 71%) from B3.
  • Subordinated notes downgraded to Caa2 (LGD6, 90%) from Caa1.
  • The rating outlook for Hub is stable.
  • Factors that could lead to an upgrade of Hub’s ratings include (i) adjusted (EBITDA – capex) coverage of interest exceeding 2x, (ii) adjusted free-cash-flow-to-debt ratio exceeding 5%, and (iii) adjusted debt-to-EBITDA ratio below 5.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.2x, (ii) adjusted free-cash-flow-to-debt ratio below 2%, or (iii) adjusted debt-to-EBITDA ratio above 8x.

Sedgwick Holding Inc. (Sedgwick)

  • Corporate family rating unchanged at B2
  • Probability of default rating assigned at B2
  • First-lien revolving credit facility upgraded to B1 (LGD3, 36%) from B2
  • First-lien term loan upgraded to B1 (LGD3, 36%) from B2
  • Second-lien term loan downgraded to Caa1 (LGD5, 87%) from B3
  • The rating outlook for Sedgwick is stable.
  • The primary factor that could lead to an upgrade of Sedgwick’s ratings would be a long-term reduction in financial leverage, with (i) adjusted debt-to-EBITDA ratio under 4.5x, (ii) adjusted free-cash-flow-to-debt ratio exceeding 6%, and (iii) adjusted (EBITDA – capex) coverage of interest of 3x or more.
  • Factors that could lead to a rating downgrade include (i) adjusted debt-to-EBITDA ratio over 6.5x for a sustained period, (ii) adjusted free-cash-flow-to-debt ratio of 3% or less, or (iii) adjusted (EBITDA – capex) coverage of interest below 1.5x.

Towergate Holdings II Limited (Towergate)

  • Corporate family rating unchanged at B2
  • Probability of default rating assigned at B2

Towergate Finance plc:

  • Senior secured revolving credit facility upgraded to Ba3 (LGD2, 29%) from B1
  • Senior secured acquisition facility upgraded to Ba3 (LGD2, 29%) from B1
  • Senior secured term loans upgraded to Ba3 (LGD2, 29%) from B1
  • Senior secured notes upgraded to Ba3 (LGD2, 29%) from B1
  • Senior unsecured notes downgraded to Caa1 (LGD5, 82%) from B3
  • The rating outlook for the Towergate entities is negative.
  • Factors that could lead to a stable rating outlook for Towergate include (i) adjusted EBITDA coverage of interest exceeding 1.5x, (ii) adjusted debt-to-EBITDA ratio below 6x, and (iii) conservative strategy toward acquisitions as the business deleverages.
  • Factors that could lead to a rating downgrade include (i) a meaningful and unprofitable acquisition strategy, (ii) adjusted debt-to-EBITDA ratio above 8x, including any off-balance-sheet debt obligations, (iii) adjusted EBITDA coverage of interest remaining below 1.25x, or (iv) any significant capital repatriation outside the restricted group of companies.

USI Holdings Corp. (USI)

  • Corporate family rating unchanged at B3
  • Probability of default rating assigned at B3
  • Senior secured revolving credit facility upgraded to B1 (LGD2, 28%) from B2
  • Senior secured term loan upgraded to B1 (LGD2, 28%) from B2
  • Senior unsecured notes downgraded to Caa1 (LGD5, 76%) from B3.
  • Subordinated notes downgraded to Caa2 (LGD6, 92%) from Caa1.
  • The rating outlook for USI is stable.
  • Factors that could lead to an upgrade of USI’s ratings include (i) adjusted (EBITDA – capex) coverage of interest exceeding 2x, (ii) adjusted free-cash-flow-to-debt ratio consistently exceeding 5%, and (iii) adjusted debt-to-EBITDA ratio below 5.5x.
  • Factors that could lead to a rating downgrade include (i) adjusted (EBITDA – capex) coverage of interest below 1.2x, (ii) adjusted free-cash-flow-to-debt ratio below 2%, or (iii) adjusted debt-to-EBITDA ratio above 8x.

The principal methodology used in these ratings was Moody’s Global Rating Methodology for Insurance Brokers & Service Companies published in February 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

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