Fidelity National Financial, Inc. FNF announced the pricing of $650 million aggregate principal amount of senior unsecured notes. The notes carry an interest rate of 3.4% and are scheduled to mature on Jun 15, 2030.
The aforementioned senior notes will pay interest on a semi-annual basis on Jun 15 and Dec 15.
The company plans to deploy the net proceeds to pay back $640 million principal amount borrowed under the term loan credit agreement as well as for general corporate purposes.
The company displayed prudence by issuing senior notes amid a low interest rate environment to procure funds and enhance financial flexibility without affecting liquidity. As of Mar 31, 2020, this Zacks Rank #3 (Hold) title insurer had cash and cash equivalents of $890 million, short-term investments of $1.258 billion and available capacity under Revolving Credit Facility of $800 million. Further on Apr 22, 2020, the company entered into the Term Loan Agreement, which provides for a $1 billion, 364 day delayed-draw, term loan.
By capitalizing on the low interest rate environment, the company is also attempting to reduce its interest burden, thus facilitating margin expansion. Also, the company’s operational strength should enable it to service debt uninterruptedly, thereby maintaining the stock’s creditworthiness.
However, with the new issuance, interest expense will increase. But we still believe that the company is in a strong position to clear debts, banking on operational efficiencies, largely driven by organic growth.
Its debt to capital ratio was 14.1 at first-quarter 2020 end, a 50 basis points (bps) deterioration from 2019 end level but better than the industry average of 21.8. With the new issuance, debt to capital ratio will increase by 850 bps.
Times interest earned, identifying how efficiently the company can service debt, of 22.7% is much higher than the industry average of 4.3%.
The firm’s times interest earned ratio has been improving over the years. The improvement in this ratio indicates that the firm will be able to meet current obligations in the near future without any difficulties. At a time when every entity is looking to preserve liquidity as a result of the COVID-19 outbreak, an improving ratio is reassuring for investors.
Shares of Fidelity National have lost 25% year to date compared with the industry's decrease of 15.4%. Nonetheless, prudent acquisitions, strategic investments, cost management and solid capital position should help share price bounce back.
Recently, some other insurers like Radian Group Inc. RDN, Alleghany Corporation Y and Reinsurance Group of America, Incorporated RGA issued debt to capitalize on the low interest rate environment. While Radian Group offered 6.625% $525 million senior unsecured notes, Alleghany offered 3.625% $500 million senior. Reinsurance Group of America offered 3.150% $600 million senior unsecured notes.
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