NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of HRG Group, Inc. (HRG) at 'B' and revised the Rating Outlook to Stable from Positive.
Fitch has also affirmed HRG's senior secured debt at 'BB-/RR2' and senior unsecured debt at 'B/RR4'. The debt level affirmations are inclusive of the additional $160 million of senior secured notes and $140 million of senior unsecured notes issued by HRG on May 11, 2015.
KEY RATING DRIVERS
The revision of the Outlook to Stable from Positive follows the completion of several transactions by HRG and recent asset performance challenges at certain subsidiaries, which in combination have moderated Fitch's view of potential upward rating momentum over the outlook horizon. These events include two debt issuances which have resulted in higher leverage (debt/equity), and reduced dividends from subsidiaries, which has resulted in weaker dividend coverage of holding company interest expenses.
The rating affirmations and Stable Outlook are supported by modest leverage levels relative to the current ratings and the performance and dividend capacity of HRG's underlying businesses, particularly Spectrum Brands, Inc. (Spectrum Brands) and Fidelity & Guaranty Life Holdings, Inc. (FGL), rated 'BB-' and 'BB', respectively.
Rating constraints include the potential for opportunistic acquisitions or other activities which could alter HRG's risk profile, as well as the concentrated and less liquid nature of HRG's portfolio of investments. HRG is exploring the sale of all or part of FGL, which would free up capital, but would also further concentrate the company's investment portfolio on Spectrum Brands, at least until further acquisitions are made.
The company tacked on $100 million to its senior secured debt on April 9, 2015. A second transaction to issue another $300 million in debt was announced on May 11, 2015. The transaction is comprised of $160 million in senior secured debt and $140 million in senior unsecured debt. Proceeds of the senior secured debt transaction are expected to be used for working capital and general corporate purposes, while proceeds of the unsecured debt transaction, plus existing cash, will be used to fund additional investment in Spectrum Brands. Pro forma for the most recent debt issuance, Fitch calculates that HRG's debt/equity was 2.15x at March 31, 2015, up from 1.13x at FY 2014.
At 0.66x, HRG's upstream dividend coverage of holding company interest expenses was below 1.0x in the LTM ending March 31, 2015, driven by increased holding company interest expenses and reduced dividend upstream from certain portfolio companies. This offsets improvements over the past two years which were due to higher one-time dividend distributions by the company's subsidiaries. The FY 2014 coverage ratio of 1.7x was elevated due to large nonrecurring distributions from FGL as well as Compass Production Partners (Compass). Fitch views a sustained reduction in interest coverage below 1.0x as a potential negative rating driver. Until upstream dividends are restored, HRG is effectively using holding company cash and investments to service interest expenses, which incrementally erodes capitalization levels.
Leucadia National Corp. ('BBB-', Outlook Stable) has accumulated an ownership stake in HRG equal to approximately 23% of outstanding shares. The increased diversity in HRG's ownership group is viewed positively by Fitch. In particular, the percentage of shares owned by Harbinger Capital Partners LLC and its affiliates has been reduced to 17%, down significantly from prior amounts. The concentration of ownership in a hedge fund operated by the (now former) CEO of HRG was historically viewed as a rating constraint.
The affirmation of HRG's senior secured debt at 'BB-/RR2' reflects Fitch view of the notes benefitting from superior recovery prospects, which results in a two-notch uplift from HRG's IDR.
The affirmation of HRG's senior unsecured debt at 'B/RR4' reflects Fitch view of the notes benefitting from average recovery prospects, which results in equalization with HRG's IDR.
RATING SENSITIVITIES
The revision of the Outlook to Stable reflects Fitch's view of limited upward rating momentum over the outlook horizon. Even so, the following developments could result in potential long-term upward rating momentum in HRG's IDR:
--Prudent deployment of balance sheet cash and further diversification of investments;
--Improvement in parent company interest coverage to over 1.5x on a sustained basis;
--Leverage (debt-to-equity) at the parent level maintained below current levels.
The following drivers could result in downward pressure on HRG's IDR:
--Increase in risk appetite in the company's future cash deployment;
--Significant increase in parent company leverage;
--A sustained reduction in interest coverage below 1.0x;
--Deterioration in operating performance at any of HRG's significant subsidiaries which results in a material decline in their value, dividend capacity and/or credit ratings.
The senior secured debt rating of 'BB-/RR2' is sensitive to potential changes in the company's IDR. Furthermore, the secured debt rating is sensitive to changes in the level of available asset coverage.
The senior unsecured debt rating of 'B/RR4' is sensitive to potential changes in the company's IDR. Furthermore, the unsecured debt rating is sensitive to changes in the level of available asset coverage.
HRG is a publicly traded investment holding company with consolidated assets of $31.5 billion at March 31, 2015. HRG was established 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 four business segments: consumer products through its 59% ownership in Spectrum Brands; insurance through Front Street Re, and its 81% ownership in FGL; energy through an oil & gas MLP, Compass, of which it owns 99.8%; and asset management thorough several majority and minority-interest owned firms.
Fitch has affirmed the following ratings:
HRG Group, Inc.
--Long-term IDR at 'B', Outlook to Stable from Positive;
--Senior unsecured notes at 'B/RR4';
--Senior secured notes to 'BB-/RR2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Non-Bank Financial Institutions Rating Criteria' (April 2015)
Applicable Criteria and Related Research:
Global Non-Bank Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984516
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