TEXT-S&P rates Cunningham Lindsey Group Ltd

(The following statement was released by the rating agency)


CLGL is refinancing its existing capital structure in conjunction with acquisition by private-equity sponsor CVC Capital Partners. We are assigning our 'B' counterparty credit rating to CLGL following announcement of the acquisition. The stable outlook reflects our expectation that the company's credit-protection measures will support the rating in the next two years.

Rating Action On Oct. 5, 2012, Standard & Poor's Ratings Services assigned its 'B' long-term counterparty credit rating to Cunningham Lindsey Group Ltd. (CLGL) following the 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 the company's proposed first-lien facilities consisting of a $395 million term loan and a $140 million revolver. The '3' recovery rating indicates our expectation for a meaningful (50%-70%) recovery for lenders in the event of a payment default. We also assigned our 'B-' debt rating with a '5' recovery rating to the company's proposed $125 million second-lien term loan. The '5' recovery rating indicates our expectation of modest (10%-30%) recovery of principal in the event of a default. The outlook is stable.


Our counterparty credit rating on CLGL, which owns various subsidiaries across broad regions, reflects the company's marginal liquidity and limited financial flexibility resulting from its highly leveraged capital structure with a high amount of intangible assets. Furthermore, in our view the company faces integration and execution risks in its growth-by-acquisition strategy, though we believe this will be generally manageable based on its track record. Offsetting these negative factors is the company's good competitive position as one of the largest global loss-adjusting and claims-management services providers. In addition, the company differentiates itself from peers through its increasingly diverse revenue streams across a broad geographic platform and service provisions, and improving operating performance.

The $934 million (net of cash) acquisition of majority ownership interest in CLGL by CVC includes a sizable $349 million equity component (about 40% of the considered 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 ratio deteriorates to 5.8x from about 2.6x for full-year 2011 before the transaction. We believe that, although the proposed recapitalization under CVC would result in somewhat weaker credit-protection measures, the company's business and financial profile will enable it to deleverage gradually.

CLGL is issuing a seven-year first-lien term loan B of $395 million, a $140 million 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 its recapitalization in conjunction with the CVC acquisition. We expect the transaction to close in November 2012.

CLGL is one of the largest global third-party claims administrators providing services to property and casualty insurance companies, brokers, and self-insured corporations in 61 countries with 469 locations and 6,060 employees worldwide since 1923. The company was restructured and privatized in late 2007 by Stone Point Capital and Fairfax Holdings. Since then the company completed a series of acquisitions, the most significant being its acquisition of GAB Robins International (GAB) in 2009 and GAB Robins U.S. loss-adjusting services in 2011. The previous acquisitions provide CLGL meaningful presences in U.S., Australia, New Zealand, Ireland, South Africa, and China and other Asian countries. The company is currently a market leader in the U.K., Netherlands, Ireland, Australia, and New Zealand, which differentiates it from peers. The company is also known for its expertise in U.K. subsidence business and high-end specialty adjusting business. We expect the company to grow its business organically and through acquisitions because of its local orientation. Key execution and integration risk will be talent retention and potential goodwill impairment as a result of poor due diligence. Because the business is relationship driven, experienced staff is the key resource for CLGL's future business expansion.

CLGL's financial profile is limited by its marginal liquidity and financial flexibility resulting from its highly leveraged capital structure with a high amount of intangible assets. We expect CVC to contribute 65% of the pro-forma equity 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 the pro-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 with an adjusted EBITDA margin of about 14%. Total debt outstanding and capital lease outstanding were $220 million, which was about 2.0x the adjusted EBITDA. Because the company is not publicly traded, its financing resource is limited aside from its majority owners. The company's liquidity is marginal and the exchange rate creates moderate volatility to operating cash flow. Its short-term liquidity needs due to the potential acquisitions will be covered by the new credit facilities. Capital is weak, and 50% of its total assets are intangible.

Recovery analysis For the complete recovery analysis, see our recovery report on CLGL to be published in the near future.


The outlook is stable. We expect the company to enhance its market position through a series of acquisitions targeting regional small companies that generate EBITDA margins in a range of 11%-14%, and to maintain its trajectory of favorable performance, with overall organic growth in the positive low- to mid-single digits on continued market share gains. Due diligence is the key to managing acquisition risks. We expect CLGL to maintain a marginal financial profile and generate an adjusted margin of 11%-14%, with a debt-to-last-12-months adjusted EBITDA ratio of less than 6x and EBITDA fixed-charge coverage of 2x or more. Overall, we expect CLGL to maintain its earnings and stay compliant with its financial covenants under the new credit facilities. If CLGL is unable to meet these expectations, we could lower the rating one notch. A positive rating action is possible if the company demonstrates a sustainable track record of improved earnings and leverage metrics.

Related Criteria And Research U.S. Insurance Broker Criteria, April 22, 2008 Ratings List New Rating

Cunningham Lindsey Group Ltd.

Counterparty Credit Rating B/Stable/-- Senior Secured

US$395 mil 1st lien term bank ln due B

12/31/2019 Recovery Rating 3

US$125 mil 2nd lien bank ln due B-

12/31/2020 Recovery Rating 5

US$140 mil 1st lien revolver bank ln B

due 12/31/2017 Recovery Rating 3

(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net))