-- 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
-- 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.
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.
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.
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
Related Criteria And Research
U.S. Insurance Broker Criteria, April 22, 2008.
Ratings Affirmed; CreditWatch Action; Outlook Assigned
Counterparty Credit Rating
Local Currency B-/Stable/-- B-/Watch Dev/--
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-
Recovery Rating 3
US$630 mil 8.25% sr unsecd nts due CCC
Recovery Rating 6
Ratings Affirmed; CreditWatch Action; Recovery Ratings Unchanged
Senior Secured B B/Watch Dev
Recovery Rating 2 2
Local Currency CCC CCC/Watch Dev
Recovery Rating 6 6
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