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Fitch Affirms Loews Corporation's IDR at 'A'; Outlook Revised to Negative
April 12, 2017 / 7:46 PM / 5 months ago

Fitch Affirms Loews Corporation's IDR at 'A'; Outlook Revised to Negative

(The following statement was released by the rating agency) CHICAGO, April 12 (Fitch) Fitch Ratings has affirmed Loews Corporations' (Loews; NYSE: L) long-term Issuer Default Rating (IDR) and senior unsecured notes at 'A'. The Rating Outlook is revised to Negative from Stable. The Negative Outlook reflects Fitch's application of its 'Rating Investment Holding Companies' criteria, in particular the quality and diversification of dividend flows from investees. The Fitch-calculated blended income stream rating is 'BBB' based on each subsidiary's credit rating/opinion and dividend income contribution. Fitch has historically notched up the blended income stream one notch for dividend diversification. While Loews' robust liquidity, considerable asset liquidity, resilient dividend characteristics, favorable investment policy and record, and strong credit metrics provide an additional two notches uplift from the blended income stream. However, Fitch does not expect the dividend mix to change materially over the next couple of years without an improvement in the underlying cash flow streams of its energy subsidiaries or investments in new subsidiaries. While the recently announced acquisition of Consolidated Container Company (CCC) provides subsidiary diversification, material dividend contributions from CCC are not anticipated for at least a few years. Approximately $1.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Loews' ratings reflect the holding company's track record of being a good steward of capital, robust coverage and leverage metrics, and strong financial flexibility and cash and investments position. These considerations are offset by a nearly complete reliance on a single subsidiary for ongoing dividend flows with limited prospects for diversification improvements and possibility that Loews' other subsidiaries may require material capital support for reinvestment and growth, albeit low near-term. HEIGHTENED DIVIDEND CONCENTRATION, INSURANCE RISKS EXPOSURE Loews has historically benefited from a fairly well diversified stream of dividends with some shorter term variation given the underlying economic condition of each subsidiary's business. However, dividend flows to Loews have and, at least for the next few years, will continue to be highly reliant on a single subsidiary. CNA Financial Corporation (NYSE: CNA; 'BBB+' IDR/ 'A' Insurer Financial Strength/Outlook Stable) is expected to provide over 90% of total 2017 dividend income. CNA is a primary source of dividend cash flows to Loews. CNA has paid a $2.00 per share special dividend in 2015, 2016, and 2017 in addition to $1.00 per share ordinary annual dividends. Fitch assumes that CNA's $2.00 per share special and $1.00 per share regular dividend payments will be retained over the near term. CNA's standalone ratings reflect its strong capitalization, stable earnings, and adequate reserve quality. CNA's ratings also reflect anticipated challenges in a competitive property/casualty market rate environment, the potential for adverse reserve development and deterioration in runoff operations including long-term care (LTC). In particular, industry leaders in LTC have reported significant adverse reserve development. CNA unlocked its active life reserve in 2015 reducing the near-term risk of further large adverse loss experience. Diamond Offshore Drilling Inc. (NYSE: DO), during the first quarter of 2016, decided to discontinue its dividend as the oil price weakness continues to compound the effects of the offshore rig oversupply cycle. The dividend decision is expected to incrementally improve near-term liquidity to maintain financial flexibility. Fitch forecasts that Diamond will not pay any dividends over the medium term. In February 2014 Boardwalk Pipeline Partners, LP (NYSE: BWP; 'BBB-'/Outlook Stable) reduced its dividends by 81% (Loews' share dropped to $52 million in 2014, 2015, and 2016 from $297 million in 2013). The reduction was mainly due to U.S. shale natural gas supply-demand shifts that have impaired pipeline economics for two of its significant assets challenging contract renewals. While Boardwalk is pursuing projects to improve competitiveness and diversifying its offerings, capital spending over the next several years will limit dividend growth. Fitch projects that dividends will remain flat over the next few years. ROBUST COVERAGE, LEVERAGE, AND LTV METRICS Dividend and investment income, net of corporate-level expenses, provide robust coverage of interest costs and fixed charges of Loews' outstanding parent-level corporate obligations. Coverage was 10.0x and 11.3x for the years ended Dec. 31, 2015 and 2016, respectively. Fitch's base case forecasts coverage will remain strong for the rating category remaining in the 10x-10.5x range for the next few years. Leverage metrics are strong on a cash flow and loan-to-value (LTV) basis. Cash flow-based leverage was approximately 2.3x and 2.2x for the years ended Dec. 31, 2015 and 2016. Fitch's base case forecasts leverage metrics will remain strong at approximately 2.5x for the next few years. Fitch-calculated LTV, as of March 28, 2017, is estimated to be approximately 9% considering all Loews assets and about 13% considering only the value of Loews' publicly traded subsidiary ownership positions. Fitch's criteria also consider the stressed valuation of assets in order to consider their inherent volatility based on historical price movements. Fitch-calculated loan-to-stressed value, as of March 28, 2017, is estimated to be under 12% considering all Loews assets and over 17% considering only the value of Loews' publicly traded subsidiary ownership positions. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Loews include: --CNA dividends that remain flat year-over-year in 2017 following the $2 per share special dividend. Fitch assumes that CNA dividends remain level, which it does not expect will result in material pressure on capital levels and Fitch IFS ratings in the medium term; --Diamond dividends remain discontinued due to the challenged offshore drilling operating environment; --Boardwalk dividends remain flat at approximately $52 million; --Operating costs relatively consistent with historical levels; --Modest near-term subsidiary capital investments; --Loews equity activity remains balanced with management's long-term value-creation objective resulting in cash and investment balances maintained near current levels to moderate the effects of, and act opportunistically, during market downcycles. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Improvements in the underlying credit quality of investees and subsidiary dividend flow diversification; --Maintenance of a conservative financial and investment policy that retains robust interest coverage and leverage metrics, as well as liquidity. A revision of the Rating Outlook to Stable from Negative will be linked to an improvement in underlying credit quality of investees or a material increase in dividend diversification. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Continued reliance on CNA for the majority of dividend flows with limited visibility for material contributions from other subsidiaries; --Weakening underlying credit quality of investees that could, among other things, require considerable Loews support resulting in reduced liquidity; --Material change in Loews' financial and investment policies; --Mid-cycle interest coverage below 4.5x and/or cash flow-based leverage metrics exceeding 2.5x for a sustained period; --Holding company-level acquisitions and/or shareholder-friendly actions inconsistent with the expected cash flow and leverage profile. A downgrade will be linked to a decline in underlying credit quality of investees or continued dividend concentration with limited visibility for diversification. STRONG FINANCIAL FLEXIBILITY, CASH & INVESTMENTS POSITION The holding company structure, with Loews' largest investments held in multiple majority-owned, publicly-listed companies, enhances its financial flexibility. This structure also protects Loews from having any recourse indebtedness of its investees. Additionally, there are no cross default provisions between subsidiaries or between the parent and subsidiaries. Loews had pro forma cash and investments of approximately $4.9 billion, as of Dec. 31, 2016, including the first quarter 2017 CNA regular and special dividend payments, BWP regular dividend payments, and cash used to fund the pending CCC transaction. Investment holdings are mainly comprised of cash equivalents and U.S. government bonds. Management indicated that it has and will continue to hold significant amounts of cash & investments to moderate the effects of and act opportunistically during market downcycles. LONG-DATED MATURITIES, COVENANT LITE TERMS Loews does not have any debt maturities until 2023. The holding company is not subject to any material financial covenants. Contact: Primary Analyst Dino Kritikos Senior Director +1-312-368-3150 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Gerry Glombicki Director +1-312-606-2354 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS Fitch has made no material adjustments that are not disclosed within the company's and its subsidiaries' public filings. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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