Fitch Places Marsh & McLennan's Ratings on Rating Watch Negative.Business Editors CHICAGO--(BUSINESS WIRE)--May 20, 2004 Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has placed the 'A+' senior debt rating and 'F1' short-term rating of Marsh & McLennan Companies, Inc. (MMC See MultiMediaCard and Microsoft Management Console. ) on Rating Watch Negative. Today's action follows the recent announcement that MMC plans to buy Kroll Inc. (Kroll) for $1.9 billion. Kroll is a leading global consultant in the area of investigation, intelligence, financial, security and technology services. The rationale is based on uncertain financing plans. Management has commented that the deal will be funded with a mix of cash-on-hand and debt financing Debt Financing When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay . While Fitch recognizes that MMC has cash balances of $634 million at March 31, 2004 and can generate substantially more cash prior to the planned acquisition close, the current analysis conservatively considers the deal being financed with new debt, and perhaps commercial paper in the near-term. In this scenario, MMC's debt-to-earnings before interest and taxes increases to above 2.1x from 1.4x, using pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma year-end 2003 results. If the acquisition is substantially funded with cash-on-hand and earnings generated between now and the close, Fitch will likely affirm the ratings. However, if the deal is primarily funded with debt, then a one-notch downgrade is a likely outcome. If fully debt-funded, the combined entity will produce an earnings coverage ratio in the 8x-9x range based on Fitch's conservative pro forma estimate, which is lower than MMC's 14x level reported in recent years. With the increase in intangibles, cash flow coverage quality becomes an even more important consideration. Also, while this ultimately may be a temporary drop in interest coverage, the potential degree of volatility is somewhat high for MMC's strong ratings. Strategically, Fitch believes the acquisition aligns with MMC's objective to provide risk management services to corporations. Kroll has generated good operating margins in recent periods and the combined operation Noun 1. combined operation - a military operation carried out cooperatively by two or more allied nations or a military operation carried out by coordination of sea, land, and air forces is expected to generate expense synergies of at least $30 million. The ratings are supported by MMC's strong operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before , diverse business profile and excellent cash flow generation. Although internal and external factors at Putnam depressed assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. growth in recent periods causing a material decline in investment management's operating profits, MMC's overall earnings have grown through strong results in the insurance brokerage operation. The rating analysis also considers MMC's large cash demands, which include fixed obligations, rents, common-stock dividends, potential stock buybacks and employee retirement costs. In addition, Fitch continues to monitor issues surrounding Putnam - and anticipates that assets under management will continue to show a slowdown in outflows during 2004. Further, Fitch recognizes that other investigations and class action lawsuits class action lawsuit A lawsuit in which one party or a limited number of parties sue on behalf of a larger group to which the parties belong. For example, investors may bring a class action lawsuit against a brokerage firm that has actively promoted a tax are ongoing surrounding the Putnam market-timing activity, but at the current time considers these items to be secondary relative to the charges settled last month. If this view should change, Fitch will revisit re·vis·it tr.v. re·vis·it·ed, re·vis·it·ing, re·vis·its To visit again. n. A second or repeated visit. re its rating analysis as needed as needed prn. See prn order. . In a similar context, Fitch's ratings reflect the opinion that the contingent commission issue will not lead to any material financial impact for MMC. Note: These ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on public information. Entity/Issue/Type Action Rating Marsh & McLennan Companies, Inc. -- Senior debt, on Rating Watch Negative, 'A+'; -- Commercial paper, on Rating Watch Negative, 'F1'. Marsh USA Inc. -- Commercial paper, on Rating Watch Negative, 'F1'. |
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