Marsh & McLennan (MMC) Gets Rating Actions, Outlook Down

Buy or sell dice

Credit ratings giant Moody's Investors Service has affirmed the Baa1 senior unsecured debt and P-2 commercial paper ratings for Marsh & McLennan Companies, Inc.MMC . The rating followed the company's announcement of acquiring UK-based insurance broker Jardine Lloyd Thompson Group plc ("JLT") for a total cash consideration of $5.6 billion. Its rating outlook has changed to negative from stable.

The downgrade in rating outlook is driven by a projected increase in financial leverage and the execution risk associated with the JLT buyout. This transaction is expected to close during the spring of 2019, subject to closing approvals.

Ratings Representation

Per the credit rating agency, the acquisition of JLT sounds strategically fit for the company but credit negative due to expected rise in debt along with execution risk. This transaction is expected to drive the acquirer's revenue base by nearly 13%. JLT will accelerate its capabilities in industry specialties like energy, mining, healthcare, construction, marine and aerospace along with expanding the group in reinsurance brokerage.

For funding this deal, Marsh & McLennan will borrow loans. The agency expects that its debt-to-EBITDA ratio will increase above 4x after completion of the transaction, higher than its historical leverage of 2.6x-2.8x while (EBITDA - capex) interest coverage will fall to mid-single digits from high-single range. Moreover, the agency states that the buyout will expose the company to high execution risk, consisting of potential attrition among producers and clients. JLT has weaker profit margins than the acquirer, which the group intends to improve.

However, Moody's expects Marsh & McLennan to lower its financial leverage toward its historical levels through debt repayment and EBITDA growth over a period of 12-18 months after the purchase. The company has announced to slow down its share buybacks and other acquisitions to help this deleveraging process.

The company's ratings represent its international presence, diversification among clients, areas and products, proficiency in complex risk and human resource solutions to global, national and middle market account and record of long-term profitable growth.

Meanwhile, the company's financial leverage, potential liabilities and its exposure to fluctuating pension obligations remain concerns.

Factors Driving Future Ratings

Moody's can upgrade the ratings provided there is a smooth integration of both parties with continued profitable growth, reduction of debt-to-EBITDA ratio below 3.2x after the buyout, (EBITDA - capex) coverage of interest remaining in the mid-single digits or above and net profit margin remaining in the high-single digits or higher.

Notably, the agency can downgrade the ratings if the debt-to-EBITDA ratio is above 3.2x on a sustained basis, (EBITDA - capex) coverage of interest lies below 5x and net profit margin falls below 8%.

Shares of this Zack Rank #3 (Hold) company have gained 5.5% in a year's time, underperforming its industry 's growth of nearly 8%.

Stocks to Consider

Investors interested in the insurance sector might take a look at a few better-ranked stocks like The Navigators Group, Inc. NAVG , Alleghany Corporation Y and First American Financial Corporation FAF .

Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company sports a Zacks Rank #1 (Strong Buy) and managed to deliver positive results in three of the trailing four quarters with an average four-quarter positive surprise of 19.54%. You can see the complete list of today's Zacks #1 Rank stocks here .

Operating in the Reinsurance and Insurance segments, Alleghany Corporation offers related services in the United States as well as internationally. The company has a Zacks Rank of 1 and came up with an average three-quarter earnings surprise of 17.61%.

First American Financial and its subsidiaries provide financial services to its customers. The stock carries a Zacks Rank #2 (Buy) and pulled off an average four-quarter beat of 8.22%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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