TEXT-S&P affirms USI Inc 'B-' rating, removes from credit watch
Overview -- USI Inc. is refinancing its existing capital structure in conjunction with its announced $2.3 billion leveraged buyout by Onex Corp. -- We are affirming our 'B-' counterparty credit rating on USI and removing it from CreditWatch Developing. -- At the same time, we are assigning our 'B-' issue-level and '3' recovery ratings to the company's proposed senior secured facility and our 'CCC' issue-level rating and '6' recovery ratings to its proposed senior unsecured facility. -- The stable outlook reflects our view that USI's credit protection measures will improve modestly throughout 2013 due to favorable organic and inorganic earnings growth trends. Rating Action On Dec. 4, 2012, Standard & Poor's Ratings Services affirmed its 'B-' counterparty credit ratings on USI Inc. (USI Holdings Inc. is the current issuer--all debt is to be issued by Compass Investors Inc., which is expected to be renamed "USI Inc." following the completion of the acquisition) and removed it from CreditWatch with developing implications, where we placed it on Nov. 26, 2012, following the announced acquisition of USI by Onex Corp. The outlook is stable. At the same time, we assigned our 'B-' debt rating with a '3' recovery rating, indicating our expectation for meaningful (50%-70%) recovery of principal in the event of a default, to USI's proposed senior secured facilities, consisting of a $1.025 billion term loan due 2019 and $150 million revolver (undrawn at close) due 2017. We also assigned our 'CCC' debt rating with a '6' recovery rating, indicating our expectation for negligible a (0%-10%) recovery of principal in the event of a default, to USI's proposed $630 million unsecured notes due 2020. Rationale The rating affirmation reflects our belief that, although the proposed recapitalization under private equity sponsor Onex results in meaningfully weaker credit protection measures, USI's business and financial profile will continue to support the current rating. The stable outlook reflects our view that the company will be able to de-lever modestly over the next year based on favorable organic and inorganic earnings growth trends. The announced $2.3 billion acquisition of USI by Onex includes a sizeable debt funding component that materially worsens USI's credit fundamentals. Specifically, the acquisition is being funded primarily through $1.655 billion in new debt (with all $1.1 billion of existing debt being retired), as well as an equity contribution of about $707 million. As a result of the increased debt load, Standard & Poor's adjusted total debt to EBITDA, pro forma for the transaction, deteriorates to 8.1x (excluding earnout payments) from 5.5x for the last 12 months (LTM) ended Sept. 30, 2012, before the transaction. Similarly, adjusted EBITDA fixed-charge coverage, pro forma for the transaction, deteriorates to 1.7x from 2.9x for the LTM ended Sept. 30, 2012, before the transaction. While the recapitalization has clearly worsened USI's credit profile, we believe the company's sustained competitive position and improving earnings and cash flow generating capabilities enable it to carry this increased debt load and de-lever modestly over the next year. Supporting this belief, USI has continued its track record of improving performance over the past two years, with EBITDA growing 14% in the first nine months of 2012 to $162 million and 7% in 2011 to $185 million. The performance gains were driven by modestly positive commission and fee organic revenue growth (0.8% in the first nine months of 2012 and 1% for full-year 2011, versus negative 1.9% in 2010), acquisition-related earnings, and margin improvement (EBITDA margin of 31% for the first nine months of 2012, from 28% for fiscal year 2011 and 27% for fiscal year 2010). Moreover, we expect further performance gains in 2013 resulting from successful execution of the company's sales strategies and continued improving conditions in the company's markets. The counterparty credit rating on USI reflects its limited financial flexibility stemming from its highly levered capital structure, low-quality balance sheet with negative tangible net worth, and operating performance that, although improving, has historically lagged peers and has been hurt by frequent extraordinary charges. Somewhat offsetting these weaknesses are USI's earnings diversification and encompassing product placement through its property/casualty, employee benefits, and specialized benefits divisions. USI also benefits from an enhanced competitive position through expansion of its national footprint, primarily from acquisitions, and its emphasis on organic growth and improving operating efficiencies has begun to bolster results. Outlook The outlook is stable. For 2013, we expect USI will maintain its trajectory of improving performance, with an overall organic growth rate in the positive low-single-digit area arising from successful sales strategies and producer investments, as well as improving rate and exposure trends in the company's markets. Total revenue growth will likely be at least 10% as the company supplements positive organic traction with acquisition-related growth. We also expect the company's EBITDA margins (excluding earn-out payments) to continue to be around 30% as it continues to focus on efficiency initiatives. As a result of these performance gains, we also expect credit protection measures to improve modestly by year-end 2013, with a debt to LTM adjusted EBITDA of around 7x and EBITDA fixed-charge coverage of around 2x. We could lower the ratings if the company's revenue and profitability fall short of our expectations due to the unsuccessful execution of recent strategic initiatives, a negative market occurrence, or more-aggressive financial management. Weak liquidity or debt leverage of more than 9x would also likely precipitate a downgrade. On the other hand, we would consider positive rating action if continued favorable strategic, operating, and financial performance resulting in debt to adjusted EBITDA sustainable at less than 6.5x. Related Criteria And Research U.S. Insurance Broker Criteria, April 22, 2008. Ratings List Ratings Affirmed; CreditWatch Action; Outlook Assigned To From USI Inc. Counterparty Credit Rating Local Currency B-/Stable/-- B-/Watch Dev/-- New Rating USI Inc. Senior Secured US$150 mil first lien revolver bank B- ln due 2017 Recovery Rating 3 US$1.025 bil term loan B bank ln due B- 2019 Recovery Rating 3 Senior Unsecured US$630 mil 8.25% sr unsecd nts due CCC 2020 Recovery Rating 6 Ratings Affirmed; CreditWatch Action; Recovery Ratings Unchanged To From USI Inc. Senior Secured B B/Watch Dev Recovery Rating 2 2 Senior Unsecured Local Currency CCC CCC/Watch Dev Recovery Rating 6 6 Subordinated Local Currency CCC CCC/Watch Dev Recovery Rating 6 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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