Ratings agencies shift Marsh outlook to negative over JLT deal

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Marsh’s whirlwind $5.6bn (£4.2bn) acquisition of JLT surprised ratings agencies, as it was a “larger” deal than expected from the world’s biggest broker.

Marsh parent company MMC agreed to pay £19.15 per JLT share. This is equivalent to an extra third (33.7%) more on the closing price on September 17, the day before the deal was announced.

Fitch, Standard & Poor’s and Moody’s have placed Marsh parent company MMC on watch negative, following the announcement.

“The rating watch negative reflects the expected increase in near-term debt and related increase to financial leverage as measured by debt to EBITDA, above levels acceptable for the current rating category. Increased debt will also result in lower interest coverage,” according to a Fitch announcement.

It adds: “The rating action also reflects the inherent execution risk and longer-term integration risk associated with a transaction of this size, which is larger than what Fitch perceived to be MMC’s acquisition appetite. These risks include uncertainty tied to realising anticipated expense savings and retaining key employee and clients going forward. ”

The $5.6bn deal is expected to close in Spring 2019. A review is likely to take place once there is greater “clarity” as to Marsh’s updated capital structure, according to S&P.

Despite the unexpected size of the deal, Moody’s expects that the acquisition is “strategically sound”, but credit negative due to execution risk and anticipated increase in debt.

A Moody’s announcement reads: “MMC will take on significant debt to help fund the acquisition. Moody’s estimates that MMC’s debt-to-Ebitda ratio will rise above 4x when it completes the transaction, well above its historical leverage of 2.6x-2.8x, while interest coverage will decline toward the mid-single digits from the high single digits.

“These metrics include the Moody’s standard accounting adjustments for pensions and leases. The acquisition carries execution risk for MMC, including potential attrition among producers and clients. The rating agency also said JLT has weaker profit margins than MMC, which the group aims to improve through integration and cost savings.

It took MMC and JLT just 11 days to strike up a deal, beginning on 7 September. On the day the deal was revealed, MMC CEO Dan Glaser confirmed that the ratings agencies had only been made aware of the acquisition the previous evening.

Glaser said: “Other than a heads up last night, we are at the very beginning stages of speaking with them. We maintain a very active dialogue with them and will be working through this. As I’ve said before, we are very thoughtful about how we develop the financing plan and the capital management plan around this and we believe it is consistent with maintaining a strong ratings profile.

“We are committed to maintaining strong ratings and we are at the beginning of this conversation.”

The deal is expected to lead to cost savings of $250m, according to Marsh. It could see up to 3750 of its and JLT’s combined global workforce at risk of losing their jobs.

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