CHICAGO--()--Harbinger Group Inc.'s (HRG) 'B' Issuer Default Rating (IDR) is unaffected by HRG's recent announcement that it will establish an oil and gas joint venture with EXCO Resources (EXCO).
HRG will acquire a 75% limited partnership interest and a 50% general partnership interest in the joint venture, while EXCO will acquire a 25% and 50% interest, respectively. Under the terms of the transaction HRG will provide $373 million in cash towards the purchase of properties for the joint venture.
Fitch views the transaction as in line with HRG's primary strategy to deploy its existing parent company cash and short-term investments to acquire and grow attractive businesses that generate sustainable free cash flow. The joint venture is expected to start distributing sustainable free cash flow to the partners shortly after the transaction is completed. HRG believes the transaction is expected to close in early 2013.
The initial effect on covenant tests related to HRG's senior secured debt and preferred shares is expected to be minimal.
Key rating triggers that could lead to a downgrade include a reduction in F&G Life's ordinary statutory dividend capacity to below $40 million, a change in SPB's strategy to reduce leverage to between 2.5x to 3.5x within 18 to 24 months, an increase in consolidated leverage to the 6x range, an increase in HRG (parent only) financial leverage ratio to above 70%, and the deployment of existing cash balances that increases the enterprise's credit risk.
Key rating triggers that could lead to an upgrade include an significant increase in F&G Life's ordinary statutory dividend capacity from its current level of approximately $80 million, a reduction in consolidated leverage to the 4x range, a reduction in HRG (parent only) financial leverage ratio below 40%, and the deployment of existing cash balances that improves the magnitude and diversity of cash flows to HRG.
HRG is a NYSE-traded holding company that is majority owned by investment funds affiliated with Harbinger Capital Partners LLC (Harbinger). Harbinger established HRG as a permanent capital vehicle to obtain controlling equity interests in established, dividend paying businesses that operate across a diversified set of industries. The company currently operates in three business segments: consumer products through its 57.5% ownership in SPB, insurance through its wholly owned subsidiary F&G Life, and Salus, an asset based lending business.
Fitch rates Harbinger as follows:
--Long-Term IDR 'B';
--$500 million 10.625% senior secured notes 'B/RR4'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Insurance Rating Methodology' (Oct. 18, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012).