Brown & Brown, Inc. (BRO) has priced the offering of its $500 million senior notes. The notes carry an interest rate of 4.20% and are scheduled to mature in Sep 2024.
The company intends to deploy the proceeds to pay back the outstanding amount on the revolving credit facility as well as for general corporate purposes.
Brown & Brown’s debt-to-equity ratio at second-quarter end rose to 56.4% from 23.9% at 2013 end. The deterioration was largely due to the funding of The Wright Insurance Group acquisition. With the new issuance, the ratio is expected to move up by 2,410 basis points.
Nonetheless, it seems a prudent approach by Brown & Brown to issue notes to retire revolving credit facility and therefore capitalizing on the current soft interest rate environment.
Interest expense of Brown & Brown also shot up 75% in the second quarter. The new issuance will further increase the expense. Nevertheless, the company’s solid operational performance will continue to support to service the debt uninterruptedly thereby retain its credibility.
In a separate development, Moody's Investors Service, a wing of Moody’s Corporation (MCO) assigned a Baa3 to the notes with a stable outlook. The agency stated that the rating incorporates the company’s premier market position in the U.S. insurance brokerage, efficiently serving middle market clients, sustained operating margins and strong free cash flow. However, higher financial leverage from funding the acquisition of The Wright Insurance Group, LLC is a partial dampener. Nonetheless, the rating agency believes with the accretion from the acquisition, the leverage ratio will gradually decline.
Moody’s has also stated that the rating upgrades are possible if the company maintains debt-to-EBITDA ratio below 2.2x, (EBITDA – capex) coverage of interest above 8x, and net profit margin over 10%.
However, the rating might be subject to downgrade if debt-to-EBITDA ratio moves ahead of 3x, (EBITDA – capex) coverage of interest stays below 6x, or net profit margin falls short of 8%.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock along with maintaining credit worthiness in the market. Therefore, rating downgrades affect the business, apart from increasing the cost of future debt issuances. We believe that strong ratings will help Brown & Brown retain credit worthiness and procure funds as and when required.
Brown & Brown presently carries a Zacks Rank #3 (Hold). Better-ranked insurers include Cninsure Inc. (CISG) and Erie Indemnity Company (ERIE). These stocks carry a Zacks Rank #2 (Buy).
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