Fitch Expects to Rate Aon's New Senior Debt 'BBB+'

CHICAGO--()--Fitch Ratings expects to assign a 'BBB+' rating to the proposed senior unsecured notes issuance by Aon plc (Aon). Fitch expects Aon to keep oversubscriptions.

On May 7, 2014, Fitch 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 for general corporate purposes including mergers and acquisitions.

Fitch views the proposed debt favorably overall 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. Fitch expects that the increase to pro forma financial leverage will be manageable and within both Fitch's expectations for the company and the broker sector credit factor guidelines for the current rating category.

Aon's ratings continue to reflect its strong competitive position, balance sheet and cash flow generation, very good financial flexibility, and manageable 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 recent results that included additional debt from the Hewitt Associates (Hewitt) acquisition. Pro forma leverage assuming $750 million of new debt, conservatively calculated based on annualized first-quarter 2014 EBITDA, would be roughly 2.2x and 38%, respectively, in line with historical levels. Fitch expects both ratios to remain relatively stable, assuming continued strong EBITDA growth and anticipated capital planning through 2014. Leverage is currently at levels that Fitch views as solid for the rating category.

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.

Financial flexibility has been improving year-over-year. Financial leverage has declined over the last three years while interest coverage has improved due to higher EBITDA, reduced pension liabilities and restructuring program expenses, and moderate changes to debt levels.

Fitch believes that Aon's acquisition of Hewitt has resulted 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 as far as 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

--Senior debt at 'BBB+'.

Fitch maintains the following ratings:

Aon plc

--IDR at 'BBB+';

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

--Euro500 million 2.875% senior debt due 2026 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:

--Fitch Expects to Rate Aon's New Senior Debt 'BBB+'; Affirms all ratings (May 7, 2014);

--'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:

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

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

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

U.S. Insurance Broker Industry Sector Credit Factors

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830976

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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, New York
Brian Bertsch, +1 212-908-0549
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, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com