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Ratings for Principal's New Notes

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Credit rating agencies have assigned ratings to the new debt issuance of Principal Financial Group Inc. (PFG - Free Report) .

A.M. Best Co. provided debt ratings of 'a-' with a stable outlook. Standard & Poor's Ratings Services (S&P) rated the notes 'BBB+' while Moody’s Corp. (MCO - Free Report) assigned A3 rating with a stable outlook.

The senior unsecured notes will be issued in two tranches – 3.30% senior unsecured notes worth $300 million due 2022 and 4.625% senior unsecured notes worth $300 million due 2042.

The proceeds will either be deployed to repay $400 million 7.875% senior unsecured notes due May 2014 or either in acquisitions or organic growth.

We consider Principal Financial’s debt refinancing strategy as a prudent one, as notes with lower coupon rates are issued to help redeem notes with higher coupon rates, thereby lowering interest expenses.

Principal Financial’s debt to capital ratio at the end of the second quarter was 16.3%, higher by 70 basis points over 2011 end level. With the new issuance, the ratio is expected to deteriorate by 430 basis points.

A.M. Best projects the financial leverage, following the issuance, to remain below 20% with interest coverage hovering nearly 8x earnings. On the other hand, S&P estimates debt leverage ratio to be 23%, total financial leverage ratio to be 28%, and fixed-charge coverage of 6.0x.

The ratings of A.M. Best account for Principal Financial’s improving investment portfolio and its various revenue channels. It also positively views the company’s strong foothold in the U.S. defined contribution plan market, wide spread distribution channels, persistent growth in global operations and significant cash balance. However, the impact of the low interest rate environment on spread-based product lines concerns the rating agency.

Recently, A.M. Best provided a debt rating of 'bb' with stable outlook to the upcoming issuance of $250 million senior secured notes due 2020 of CNO Financial Group Inc. (CNO - Free Report) . In July, A.M. Best conferred a rating of 'a-' on senior debt, 'bbb+' on subordinated debt and 'bbb' on preferred stock of Torchmark Corp. (TMK - Free Report) and a debt rating of 'a-' to the newly issued $250 million 2.65% senior unsecured notes due 2017 of Aflac Incorporated (AFL - Free Report) .

We have a Neutral recommendation on Principal Financial Group. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.

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