(The following statement was released by the rating agency)
CLGL is refinancing its existing capital structure in conjunction withacquisition by private-equity sponsor CVC Capital Partners.We are assigning our 'B' counterparty credit rating to CLGL followingannouncement of the acquisition.The stable outlook reflects our expectation that the company'scredit-protection measures will support the rating in the next two years.
Rating ActionOn Oct. 5, 2012, Standard & Poor's Ratings Services assigned its 'B' long-termcounterparty credit rating to Cunningham Lindsey Group Ltd. (CLGL) followingthe announcement of private-equity sponsor CVC Capital Partners' (CVC)acquisition of a majority ownership interest in the company. At the same time,we are assigning our 'B' issue-level rating with '3' recovery rating to thecompany's proposed first-lien facilities consisting of a $395 million termloan and a $140 million revolver. The '3' recovery rating indicates ourexpectation for a meaningful (50%-70%) recovery for lenders in the event of apayment default. We also assigned our 'B-' debt rating with a '5' recoveryrating to the company's proposed $125 million second-lien term loan. The '5'recovery rating indicates our expectation of modest (10%-30%) recovery ofprincipal in the event of a default. The outlook is stable.
Our counterparty credit rating on CLGL, which owns various subsidiaries acrossbroad regions, reflects the company's marginal liquidity and limited financialflexibility resulting from its highly leveraged capital structure with a highamount of intangible assets. Furthermore, in our view the company facesintegration and execution risks in its growth-by-acquisition strategy, thoughwe believe this will be generally manageable based on its track record.Offsetting these negative factors is the company's good competitive positionas one of the largest global loss-adjusting and claims-management servicesproviders. In addition, the company differentiates itself from peers throughits increasingly diverse revenue streams across a broad geographic platformand service provisions, and improving operating performance.
The $934 million (net of cash) acquisition of majority ownership interest inCLGL by CVC includes a sizable $349 million equity component (about 40% of theconsidered purchase price); however, a $585 million debt-funding component(the other 60%) somewhat worsens the company's credit fundamentals.Specifically, our adjusted pro-forma total debt-to-adjusted EBITDA ratiodeteriorates to 5.8x from about 2.6x for full-year 2011 before thetransaction. We believe that, although the proposed recapitalization under CVCwould result in somewhat weaker credit-protection measures, the company'sbusiness and financial profile will enable it to deleverage gradually.
CLGL is issuing a seven-year first-lien term loan B of $395 million, a $140million five-year revolving facility ($65 million will be drawn at closing),and a 7.5-year second-lien term loan of $125 million to finance itsrecapitalization in conjunction with the CVC acquisition. We expect thetransaction to close in November 2012.
CLGL is one of the largest global third-party claims administrators providingservices to property and casualty insurance companies, brokers, andself-insured corporations in 61 countries with 469 locations and 6,060employees worldwide since 1923. The company was restructured and privatized inlate 2007 by Stone Point Capital and Fairfax Holdings. Since then the companycompleted a series of acquisitions, the most significant being its acquisitionof GAB Robins International (GAB) in 2009 and GAB Robins U.S. loss-adjustingservices in 2011. The previous acquisitions provide CLGL meaningful presencesin U.S., Australia, New Zealand, Ireland, South Africa, and China and otherAsian countries. The company is currently a market leader in the U.K.,Netherlands, Ireland, Australia, and New Zealand, which differentiates it frompeers. The company is also known for its expertise in U.K. subsidence businessand high-end specialty adjusting business. We expect the company to grow itsbusiness organically and through acquisitions because of its localorientation. Key execution and integration risk will be talent retention andpotential goodwill impairment as a result of poor due diligence. Because thebusiness is relationship driven, experienced staff is the key resource forCLGL's future business expansion.
CLGL's financial profile is limited by its marginal liquidity and financialflexibility resulting from its highly leveraged capital structure with a highamount of intangible assets. We expect CVC to contribute 65% of the pro-formaequity to acquire a majority interest, Stone Point and Fairfax to roll 20%,and Allied World Assurance Co. to co-invest as financial partner for 8% of thepro-forma equity. The management team will likely contribute the remaining 7%to re-align its ownership and compensation structure with the shareholders.
In 2011, the company generated consolidated net income of $43.8 million withan adjusted EBITDA margin of about 14%. Total debt outstanding and capitallease outstanding were $220 million, which was about 2.0x the adjusted EBITDA.Because the company is not publicly traded, its financing resource is limitedaside from its majority owners. The company's liquidity is marginal and theexchange rate creates moderate volatility to operating cash flow. Itsshort-term liquidity needs due to the potential acquisitions will be coveredby the new credit facilities. Capital is weak, and 50% of its total assets areintangible.
Recovery analysisFor the complete recovery analysis, see our recovery report on CLGL to bepublished in the near future.
The outlook is stable. We expect the company to enhance its market positionthrough a series of acquisitions targeting regional small companies thatgenerate EBITDA margins in a range of 11%-14%, and to maintain its trajectoryof favorable performance, with overall organic growth in the positive low- tomid-single digits on continued market share gains. Due diligence is the key tomanaging acquisition risks. We expect CLGL to maintain a marginal financialprofile and generate an adjusted margin of 11%-14%, with adebt-to-last-12-months adjusted EBITDA ratio of less than 6x and EBITDAfixed-charge coverage of 2x or more. Overall, we expect CLGL to maintain itsearnings and stay compliant with its financial covenants under the new creditfacilities. If CLGL is unable to meet these expectations, we could lower therating one notch. A positive rating action is possible if the companydemonstrates a sustainable track record of improved earnings and leveragemetrics.
Related Criteria And ResearchU.S. Insurance Broker Criteria, April 22, 2008Ratings ListNew Rating
Cunningham Lindsey Group Ltd.
Counterparty Credit Rating B/Stable/--Senior Secured
US$395 mil 1st lien term bank ln due B
12/31/2019Recovery Rating 3
US$125 mil 2nd lien bank ln due B-
12/31/2020Recovery Rating 5
US$140 mil 1st lien revolver bank ln B
due 12/31/2017Recovery Rating 3
(Caryn Trokie, New York Ratings Unit)