Fitch Downgrades Willis on Close of Acquisition; Outlook Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded its ratings on Willis North America Inc. (WNA) and Willis Group Holdings Ltd. (Willis) by one notch (see rating list below). The Rating Outlook is Negative.

Fitch's rating actions follows yesterday's close of Willis' acquisition of Hilb Rogal & Hobbs Company (HRH) for a total purchase price of $2.1 billion including the assumption of roughly $400 million of HRH's debt.

Fitch's rating action reflects an expectation of significantly increased financial leverage at Willis now that the transaction has closed. When the deal was announced in June 2008, Willis management said that it expected the combined entity's debt-to-EBITDA ratio to increase to 3.2 times (x), which is well above Fitch's maximum range of roughly 2.5x for insurance brokers at Willis' current rating level.

Willis will fund the transaction with roughly $800 million of WSH common stock with the remainder funded through a combination of new $1 billion senior credit facilities and $1.25 billion bridge financing. Willis initially expected to repurchase the roughly $850 million of new equity issued within 12-18 months after the acquisition closed through a combination of free cash flow and incremental debt, but Fitch believes that the magnitude of these share repurchases are likely to be heavily influenced by conditions in the capital markets.

When and if the shares are repurchased, Fitch believes the additional financial leverage will cause an additional strain on cash resources available to service Willis' existing debt. Willis' debt-to-total capital ratio, already high relative to other insurance brokers that Fitch rates, is ultimately expected to increase from current levels in the high 40%'s.

The rating action also reflects concerns about increases in the combined entity's exposure to intangible assets.

The Negative Rating Outlook reflects Fitch's belief that Willis may be challenged to realize the expected benefits from this transaction due to the softening insurance cycle that depresses growth opportunities and pressures profit margins for insurance brokers. Moreover, the Negative Outlook also reflects the current uncertainty in the credit markets which, if prolonged, could challenge Willis to refinance the $1 billion initially borrowed under the company's 364-day interim loan facility.

Fitch believes that Willis' insurance brokerage operations have outperformed those of its closest competitors for several years and that it will continue to do so in the near term, although the integration risk following the acquisition of HRH reduces clarity in this regard. If Willis' operating performance over the next 12-18 months continues to approximate recent results, Fitch could revise Willis' Rating Outlook to Stable.

Fitch has downgraded the following ratings:

Willis North America Inc.

--Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

--$250 million senior unsecured notes due 2010 to 'BBB-' from 'BBB';

--$350 million senior unsecured notes due 2015 to 'BBB-' from 'BBB';

--$600 million senior unsecured notes due 2017 to 'BBB-' from 'BBB'.

Willis Group Holdings Ltd.

--IDR to 'BBB-' from 'BBB'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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. The issuer did not participate in the rating process other than through the medium of its public disclosure.