Standard & Poor's Ratings Services (“S&P”) reiterated the 'BBB-' counterparty credit rating, on Willis Group Holding PLC (WSH). The rating was downgraded to stable from positive.
The rating affirmation came on the back of its dominant market position and solid sales procedures driving organic growth and margin expansion. However, lack of earnings diversification, exposure to underwriting cycles, risks associated with the implementation of strategic and operational initiatives, modest risk profile and regulatory and litigation risks counter the positives.
The downward revision of the outlook was based on the rating agency’s expectation that Willis will be unable to meet its standards. The rating agency noted that the company’s organic growth was lower than that of its peers. Also, S&P expects expenses to rise at a faster rate than revenue increase, thus inducing margin contraction in 2012.
S&P estimates better performances at few property and casualty segments, higher retention levels, initiatives to strengthen market position and widening global footprint to help Willis Group achieve organic growth in the 2%-3% range in 2012 and in the 3%-4% range for 2013.
The rating agency also projects adjusted EBITDA margin to be between 23%–25% and adjusted total obligations-to-adjusted EBITDA below 3.5x in 2012 and 2013.
S&P stated that it might consider a rating upgrade in the next two years provided Willis delivers adjusted total obligations-to-adjusted-EBITDA lower than 3.0x and adjusted EBITDA fixed-charge coverage more than 5.5x and solidifies its market presence as well as sustains superior operating margins by effective implementation of revenue and expense initiatives.
The rating agency, however, cautions that excessive use of debt leverage along with operational, legal, and regulatory risks will likely weigh on any positive action.
On the flip side, the ratings will be subject to downgrade if Willis loses market share or face hiccups in brand recognition, endangering its market presence, or if adjusted total obligations-to-adjusted EBITDA moves beyond 4x or adjusted EBITDA fixed charge coverage falls below 4x, faces liquidity crunches and margin contracts radically. These, coupled with regulatory or legal risks could also affect ratings.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. On the other hand, rating downgrade adversely affects the business, besides increasing costs of future debt issuances.
We retain our Neutral recommendation on Willis Group. The quantitative Zacks Rank for Willis Limited is currently “3," indicating no clear directional pressure on the shares over the near term. Aon Corporation (AON), Arthur J Gallagher & Co. (AJG) and Marsh & McLennan Companies, Inc. (MMC), which closely compete with Willis also share a Zacks Rank # 3.
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