Approximately $1.7 billion of new credit facilities rated
New York, October 24, 2016 -- Moody's Investors Service has affirmed the B3 corporate family rating and B3-PD probability of default rating of Acrisure, LLC following the company's announcement of a management-led buyout alongside Abry Partners and a consortium of minority investors. Moody's has also assigned ratings of B2 and Caa2 to Acrisure's proposed first-lien and second-lien credit facilities, respectively (see list below). The rating agency will withdraw the ratings from Acrisure's existing credit facilities upon closing of the recapitalization. The rating outlook for Acrisure is stable.
Acrisure's ratings reflect its growing market presence in US insurance brokerage, its good mix of business across property & casualty insurance and employee benefits, its healthy EBITDA margins and its diversified funding sources for acquisitions, including internally generated cash, committed bank credit facilities, a committed preferred stock drawdown facility and common equity.
Offsetting these strengths is the company's rising debt burden, driven by its aggressive acquisition strategy, resulting in persistently high financial leverage. Acrisure's revenue more than tripled in 2014 and more than doubled in 2015, and it is on pace to more than double in 2016, with a commensurate rise in borrowings. Such rapid growth heightens the management challenges of integrating accounting and information systems, and limiting the firm's exposure to errors and omissions in its delivery of products and services.
Funding sources for the proposed recapitalization include borrowings under the proposed credit facilities, a large preferred stock investment by a consortium of investors led by ABRY Partners, a smaller preferred stock investment by Genstar, the existing private equity sponsor, and the rollover of substantial common equity by Acrisure Management and Agency Partners. Funds will be used to buy out existing common and preferred equity, repay all existing borrowings, and pay related fees and expenses. The parties expect to complete the recapitalization in November 2016.
Moody's estimates that Acrisure will have a pro forma debt-to-EBITDA ratio in the range of 7.3x-7.5x, (EBITDA - capex) interest coverage of about 2x, and a free-cash-flow-to-debt ratio in the low single digits following the recapitalization. These metrics reflect Moody's accounting adjustments for operating leases and contingent earnout liabilities along with run-rate earnings from completed acquisitions.
Acrisure's aggressive acquisition strategy will likely keep its financial leverage near the top of the expected range for its rating category, leaving the company with little capacity to withstand setbacks in its existing or newly acquired operations. Cash contingent earnout liabilities, which can fluctuate, represent a significant use of cash each year, with payouts exceeding cash flow from operations in certain periods.
Factors that could lead to an upgrade of Acrisure's ratings include: (i) debt-to-EBITDA ratio below 6x, (ii) (EBITDA - capex) coverage of interest exceeding 2x, (iii) free-cash-flow-to-debt ratio exceeding 5%, and (iv) successful integration of acquisitions.
Factors that could lead to a rating downgrade include: (i) debt-to-EBITDA ratio above 7.5x, (ii) (EBITDA - capex) coverage of interest below 1.2x, (iii) free-cash-flow-to-debt ratio below 2%, or (iv) significant disruptions to existing or newly acquired operations.
Moody's has affirmed the following ratings with a stable outlook:
Corporate family rating at B3;
Probability of default rating at B3-PD.
Moody's has assigned the following ratings (and loss given default (LGD) assessments):
$200 million first-lien five-year revolving credit facility rating at B2 (LGD3);
$1,175 million ($1,065 million funded at closing, $110 million available as delayed draw) first-lien seven-year term loan rating at B2 (LGD3);
$305 million ($275 million funded at closing, $30 million available as delayed draw) second-lien eight-year term loan rating at Caa2 (LGD5).
Moody's will withdraw the B2 and Caa2 ratings from Acrisure's existing first-lien and second-lien credit facilities, respectively, upon closing of the recapitalization, as these facilities will be repaid and terminated.
The principal methodology used in these ratings was Insurance Brokers and Service Companies published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Based in Grand Rapids, Michigan, Acrisure distributes a range of property & casualty insurance, employee benefits and related products to small and mid-sized US businesses through offices in 24 states, mainly in the Midwest, Northeast, Southeast and Southwest. The company generated revenue of $412 million for the 12 months through June 2016.
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