Shares of Aon Plc (AON) rose 0.8% to $87.73 over a single trading session after receiving ratings from Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO) on May 20, 2014.
Moody’s provided the $250 million and $550 million senior unsecured notes of Aon with a “Baa2” rating. The rating carries a stable outlook. These two notes, guaranteed by the U.S. subsidiary, Aon Corporation, are long-term notes with a maturity period of 10 and 30 years respectively. Aon intends to use the proceeds from the notes for general corporate purposes.
The rating action came on the back of Aon’s strong global presence. Moody’s is of the opinion that Aon is one of the major insurance brokerage and consulting firms. The company’s highly diversified business that enables it to generate healthy profit margins was also taken into account for the rating.
However, Moody’s identified Aon’s high debt levels and low fixed charge coverage metrics as negatives that could dampen the aforementioned positives. Moreover, soft business volumes in some of Aon’s businesses (particularly reinsurance) and possible liabilities might affect the strengths of the company.
Moody’s stated that the ratings could witness an upgrade if the debt-to-EBITDA ratio of the company falls below 2.5x, the company succeeds in maintaining the (EBITDA – capex) coverage of interest above 6x and the net profit margin is maintained above 9%.
On the other hand, a downgrade in the ratings is likely if the debt-to-EBITDA ratio is above 3.5x, (EBITDA – capex) coverage of interest falls below 4x or if the net profit margin of the company drops below 6%.
Strong scores from credit rating agencies play an important part in retaining investor confidence in the stock and maintaining creditworthiness in the market. We believe that Aon’s present score with the credit rating agency will help it write more business going forward.
Aon currently has a Zacks Rank #2 (Buy). Other players in the insurance brokerage industry, which look attractive at current levels, include Arthur J Gallagher & Co. (AJG) and Erie Indemnity Company (ERIE). Both the stocks carry the same Zacks Rank as Aon.
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