CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed all of Aon plc's (Aon) ratings, including the Long-Term Issuer Default Rating (IDR) and senior debt ratings at 'BBB+', and the Commercial Paper Ratings at 'F2'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings affirmation reflects Aon's continued favorable competitive position, solid balance sheet and cash flow generation, and very good financial flexibility, partially offset by a moderate run-rate level of financial leverage, all of which are within guidelines for the current rating category.
Also partially offsetting the favorable factors is the fact that, similar to other insurance brokers that Fitch rates, Aon faces contingent risks, including reputational risk and as an occasional target of litigation and regulatory actions that can have a financial impact.
Fitch believes Aon's liquidity profile is strong with cash and short-term investments of $946 million as of Sept. 30, 2016. Cash flow remains significant with earnings-based EBITDA interest coverage of roughly 9.3x for the trailing-12-month period and averaging roughly 10x over the past five years. Through the first nine months of 2016, cash flow from operations increased 14% to $1.5 billion, and free cash flow (less capital expenditures) also grew 24% to $1.3 billion, due primarily to reduced expenses and an increase in net income.
Financial flexibility continues to improve year over year. Interest coverage remains solid despite some earnings pressure and a temporary increase in interest expense from prefunded debt due in part to reduced pension liabilities and underlying working capital improvements, and decreasing capital expenditures. Fitch expects Aon's financial flexibility to remain strong going forward.
Financial leverage as measured by debt-to-EBITDA is managed at a moderately higher level relative to some of its peers and Fitch considers it to be one of Aon's key rating triggers. Leverage was roughly 2.4x at Sept. 30, 2016 and remains in line with historical levels.
Fitch expects that leverage should remain relatively stable with some modest improvement, assuming continued EBITDA growth, partially offset by continued capital planning including share repurchases, which Fitch considers discretionary. Leverage should continue to be manageable and within both Fitch's expectations for the company and the broker-sector credit factor guidelines for the current rating category, with any debt increases aligned with growing EBITDA and increased cash flow.
The ratings continue to reflect Aon's favorable competitive position among the top three global brokers, with major operations in (re)insurance brokerage and human capital consulting/outsourcing. The company continues to demonstrate its ability to retain clients and expand new business while improving free cash flow and maintaining profitability.
Partially offsetting these positive factors are continued balance sheet and earnings pressure from pension liabilities, competitive insurance market conditions particularly in reinsurance, and the global economic downturn.
RATING SENSITIVITIES
The key rating triggers that could result in an upgrade include the following:
--A sustained strong improvement in operating performance on an absolute basis and relative to peers with operating EBIT consistently over $1 billion and an operating EBIT margin near 15%;
--A run-rate debt-to-EBITDA ratio approaching 1.7x;
--Interest coverage as measured by an EBITDA-to-interest more than 12x.
The key rating triggers that could result in a downgrade include the following:
--A sustained increase in debt-to-EBITDA to more than 2.5x (adjusted for large one-time items) while maintaining an operating EBIT margin near 12%;
--A deterioration of the company's average EBITDA-to-interest expense to lower single digits;
--An impairment to goodwill that would materially impact the balance sheet and related ratios.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Aon plc
--Long-Term IDR at 'BBB+';
--$400 million 2.8% senior debt due 2021 at 'BBB+';
--$350 million 4% senior debt due 2023 at 'BBB+';
--$600 million 3.5% senior debt due 2024 at 'BBB+';
--$750 million 3.875% senior debt due 2025 'BBB+';
--EUR500 million 2.875% senior debt due 2026 at 'BBB+';
--$256 million 4.25% senior debt due 2042 at 'BBB+';
--$250 million 4.45% senior debt due 2043 at 'BBB+';
--$550 million 4.6% senior debt due 2044 at 'BBB+';
--$600 million 4.75% senior debt due 2045 at 'BBB+';
--Short-Term IDR at 'F2';
--Commercial Paper Rating at 'F2'.
Aon Corporation
--Long-Term IDR at 'BBB+';
--$600 million 5% senior debt due 2020 at 'BBB+';
--$521 million 8.205% junior subordinated deferrable interest debentures due 2027 at 'BBB-';
--$300 million 6.25% senior debt due 2040 at 'BBB+';
--Short-Term IDR at 'F2';
--Commercial Paper Rating at 'F2'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016224
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016224
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https://www.fitchratings.com/regulatory
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