TEXT-S&P affirms USI Inc 'B-' rating, removes from credit watch

Tue Dec 4, 2012 7:50pm GMT

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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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