Fitch Expects to Rate Aon's New Senior Debt 'BBB+'; Affirms All Ratings

NEW YORK--()--Fitch Ratings expects to assign a 'BBB+' rating to the proposed Euro500 million 12-year senior unsecured notes issuance by Aon plc (Aon). Additionally, Fitch has affirmed all of Aon's ratings, including the Issuer Default Rating (IDR) and senior debt ratings at 'BBB+', and the commercial paper ratings at 'F2'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The new notes are fully and unconditionally guaranteed by Aon Corporation (Aon Corp.) and the ratings are therefore based on Aon Corp.'s existing Fitch 'BBB+' IDR. The net proceeds from this new senior debt issuance will be used to refinance Aon Services Luxembourg & Co S.C.A. senior unsecured debt of the same amount maturing in July 2014.

Fitch views the proposed debt favorably as the new senior debt will likely be issued at an attractive rate given current market conditions and will have a long-dated maturity, resulting in an improved liquidity profile with reduced near-term refinancing risk. Fitch does not expect change to pro forma financial leverage following the debt issuance, since the proceeds will be used to refinance existing debt.

The ratings affirmation reflects Aon's strong competitive position, balance sheet and cash flow generation, very good financial flexibility, and financial leverage which are all within guidelines for the rating category.

At March 31, 2014, financial leverage as measured by debt-to-EBITDA was roughly 1.9x, and, debt-to-total capital, equity credit adjusted, was 35.3%, representing improvement over historical results that included additional debt from the Hewitt Associates (Hewitt) acquisition. Leverage is currently at levels that Fitch views as solid for the rating category. Fitch expects both ratios to remain stable with modest run-rate improvement going forward.

Fitch believes Aon's liquidity profile is strong with unrestricted cash and short-term investments of roughly $786 million as of Dec. 31, 2013. Cash flow remains significant with earnings-based EBITDA interest coverage of roughly 11.0x. The company generated $1.6 billion of cash flow from operations for the full year 2013 compared to $1.4 billion in 2012.

The ratings continue to reflect Aon's favorable competitive position among the top three global brokers, with major operations in (re)insurance brokerage and human capital consulting/outsourcing. The company continues to demonstrate its ability to retain clients and expand new business while improving profitability.

Partially offsetting these positive factors is continued earnings pressure from ongoing restructuring expenses through year-end 2013 when the Aon Hewitt Plan closed, competitive insurance market conditions, and the global economic downturn. Organic growth in the brokerage segment was on par with the peer average in 2013. Favorably, the company reported organic revenue growth in both the Risk Solutions and HR Solutions businesses in 2013 and through the first three months of 2014.

Fitch believes that in the long term, Aon's acquisition of Hewitt will result in positive business and operational synergies, with reasonable integration risk. Aon expects cumulative annual expense savings of $402 million to be fully realized by the end of 2014. Fitch also believes that the current management team has a very good track record related to the execution of strategic plans and expense cutting, and any remaining integration risk is anticipated to be manageable. As of March 31, 2014, Aon was on track to meet its stated expectations.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include a sustained strong improvement in operating performance on an absolute basis and relative to peers with operating EBIT consistently over $1 billion and an operating EBIT margin near 15%, a run-rate debt-to-EBITDA ratio less than 1.5x, and interest coverage as measured by an EBITDA-to-interest ratio more than 12x.

The key rating triggers that could result in a downgrade include a sustained increase in the debt-to-EBITDA ratio to more than 2.25x, a deterioration of the company's average EBITDA-to-interest expense ratio to lower single digits, and any impairment to goodwill that would materially impact the balance sheet and related ratios.

Fitch expects to assign the following rating:

Aon plc

--Euro500 million senior debt at 'BBB+'.

Fitch has affirmed the following ratings:

Aon plc

--IDR at 'BBB+';

--$350 million 4.0% senior debt due 2023 at 'BBB+';

--$256 million 4.25% senior debt due 2042 at 'BBB+';

--$250 million 4.45% senior debt due 2043 at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Aon Corporation

--IDR at 'BBB+';

--$600 million 3.5% senior debt due 2015 at 'BBB+';

--$500 million 3.125% senior debt due 2016 at 'BBB+';

--$600 million 5% senior debt due 2020 at 'BBB+';

--$521 million 8.205% junior subordinated deferrable interest debentures due 2027 at 'BBB-';

--$300 million 6.25% senior debt due 2040 at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Aon Services Luxembourg & Co S.C.A.

--IDR at 'BBB+';

--Euro500 million 6.25% senior debt due 2014 at 'BBB+'.

The Rating Outlook is Stable.

Additional information is available on Fitch's web site at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Insurance Broker Industry Sector Credit Factors' Special Report (May 4, 2012);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);

--'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis' (Dec. 23, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

U.S. Insurance Broker Industry Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677409

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Gretchen Roetzer
Director
+1-312-606-2327
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson
Director
+1-212-908-0220
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Gretchen Roetzer
Director
+1-312-606-2327
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gregory Dickerson
Director
+1-212-908-0220
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com