Last week, Fitch Ratings conferred a “BB” rating to the recently announced senior secured notes of CNO Financial Group Inc. (CNO - Analyst Report). Earlier last week, the company announced an increase in the size of its offering of senior secured notes due 2020 to $275 million from $250 million. The company also announced an interest of 6.375% per annum on the senior notes, which will be payable on the first day of April and October every year.
Concurrently, CNO Financial revealed that it might boost the size of its new 6-year term loan facility to $425 million from $400 million. However, Fitch has not yet rated this term loan facility since the terms and conditions are yet to be finalized. However, the rating agency expects to assign ratings at par with those on the current bank facility as the covenants in the new facility are expected to be akin to the ones in the current facility.
Fitch expects an upward revision in ratings if CNO Financial manages to consistently generate stable earnings after eliminating special charges or sustains reported interest coverage ratio above 6x and NAIC risk-based capital above 350%. Further, if the company maintains a larger cushion than required under the existing covenant or if its debt profile improves following the refinancing to match that of peers, then an upgrade is possible.
On the other hand, if CNO Financial faces weakening operating results or a material rise in credit-related impairments in 2012 or the combined NAIC risk-based capital ratio falls below 300% and operating leverage rises above 20x, then a rating downgrade is likely. Additionally, if the financial leverage and TFC rise beyond 30% and 0.65x, respectively, then Fitch may revise the ratings downward.
Fitch expects CNO Financial’s pro-forma financial leverage to surge to 22% due to the recapitalization from 16.7% as of June 30, 2011. The company, which competes with AFLAC Inc. (AFL - Analyst Report) and Torchmark Corp. (TMK - Analyst Report), carries a short-term Zacks #2 Rank (Buy).