Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO - Analyst Report) has provided the pending debt issuance of Aon plc (AON - Analyst Report) with a “Baa2” rating. The rating carried a positive outlook.
The proceeds from the senior unsecured notes, guaranteed by Aon’s main U.S. subsidiary, Aon Corporation will be used for general corporate purposes and repayment of the commercial paper borrowings.
The ratings came on the back of Aon’s strong global foothold, huge clientele across various businesses, diversified product portfolio and proficient provision of risk and human resource solutions to middle-market, national and global customers.
So far in 2013, Aon generated 3% organic revenue growth and maintained robust earnings before interest, tax, depreciation and amortization (EBITDA) and net profit margins. Moreover, Aon is the holding company of one of the leading insurance brokerage and consulting businesses in the world that has helped it generate strong profits over the past few years. Moody’s also recognizes that Aon is capable of improving margins further as it approaches the culmination of its restructuring initiatives.
However, as per Moody’s, high financial leverage and weak fixed charge coverage metrics partially offset the strengths of the company. Slow economic growth, especially in Europe, and risks associated with the professional services business including potential liabilities that stem from errors and omissions, also weigh on Aon’s performance.
Moody’s stated that an upgrade in Aon’s ratings is likely if net profit margin approaches 10%, (EBITDA excluding capex) interest coverage is above 7x or debt-to-EBITDA ratio is below 2.5x. On the contrary, a downward revision in outlook to stable is possible if net profit margin is below 7%, (EBITDA excluding capex) interest coverage is below 5x or debt-to-EBITDA is above 3x.
Aon has scored strongly with credit rating agencies. In Oct 2013, Fitch Ratings affirmed Aon’s Issuer Default Rating (IDR) and senior debt ratings at “BBB+”. The commercial paper ratings were also affirmed at “F2”. All the ratings carried a stable outlook. Strong ratings from credit rating agencies increase creditworthiness of a company in the market. We believe that Aon’s present score with the credit rating agencies will help it write more business going forward.
Among other insurance brokers, Willis Group Holdings Inc. received Moody’s “Baa3” rating on its $250 million of 10-year and $275 million of 30-year senior unsecured notes, issued by one of its subsidiaries, Trinity Acquisition plc in Aug 2013. The rating carried a stable outlook.
Aon carries a Zacks Rank #2 (Buy). Another better-ranked stock in the insurance space is Employers Holdings, Inc. (EIG) with a Zacks Rank #1 (Strong Buy).