• Hyperion Insurance Group (Hyperion) is seeking to place a $250 million term loan B, using the proceeds to repay $153 million of its existing debt (including its Windsor Loan Note), and about $74 million to fund an acquisition that it expects to complete soon.
• We are therefore assigning our preliminary ‘B’ corporate credit rating to Hyperion.
• At the same time, we are assigning our preliminary ‘B’ issue rating to the $250 million term loan B to be issued by the group’s subsidiary, Hyperion Financial S.a.r.l.
• The stable outlook reflects our expectation that the company will continue to grow organically at a healthy rate and improve profitability as it expands its geographic and customer base.
LONDON (Standard & Poor’s) Sept. 16, 2013–Standard & Poor’s Ratings Services today assigned its preliminary ‘B’ long-term corporate credit rating to U.K.-based insurance intermediary Hyperion Insurance Group Ltd. (Hyperion). The outlook is stable.
At the same time, we assigned our preliminary ‘B’ issue rating to the proposed $250 million term loan B to be issued by Hyperion Financial S.a.r.l., a subsidiary of Hyperion. The preliminary recovery rating on the proposed loan is ‘4’, indicating our expectation of average (30%-50%) recovery for creditors in the event of a payment default.
The final ratings are subject to the successful closing of the proposed issuance and depend on our receipt and satisfactory review of all final transaction documentation.
The preliminary ratings reflect our assessment of Hyperion’s business risk profile as “fair” and financial risk profile as “highly leveraged.”
We consider Hyperion’s business risk profile to be constrained by it being smaller than peers, having relatively lower profit margins, and running the implicit risk of losing key personnel. It is also limited by the highly fragmented, competitive, and cyclical industry in which it operates. These risks are partly offset by the group’s relatively diverse customer, product, and geographic base. Its good client retention record, ability to attract and retain top talent in the industry, and strong leadership are further mitigating factors.
Pro forma the proposed transaction, we forecast the group’s Standard & Poor’s-adjusted debt to EBITDA for financial 2013 to be about 7.1x (5.8x excluding a liquidity put option of £48 million). However, we forecast this ratio to improve to 5.9x (4.7x excluding the liquidity put option) by the end of financial 2014. We include deferred earn-outs of £17 million and the liquidity put option in the calculation of debt. However, we do acknowledge that the liquidity put option is highly contingent–option holders will decide whether to exercise the option in September 2017–and it is currently deeply subordinated.
In our base case, we forecast the group’s revenues and EBITDA at about £167 million and £36 million, respectively, for the financial year ending Sept. 30, 2013 (financial 2013). For financial 2014, we expect the organic revenue to grow by a mid-single digit figure, while maintaining a steady EBITDA margin as the group focuses on specialized insurance products and new geographic regions (mainly emerging markets) which have historically achieved high growth rates.
The group has in the past demonstrated good cash flow generation, which we expect to continue. We also expect the group to generate EBITDA cash interest coverage of more than 3x. We view positively the fact that 66% of the group’s shareholdings are held by the group’s staff members and do not consider any substantial shareholder-friendly payments likely at this stage.
We expect the group to undertake bolt-on acquisitions on a regular basis, as it seeks to further diversify its product range and geographic reach. In our base case, we expect the group to undertake bolt-on acquisitions of about £10 million annually (excluding the £49 million acquisition expected to be completed in October 2013). (The bolt-on acquisition spend is not considered in our liquidity calculation because it is not contracted).
The stable outlook reflects our view that the company will continue to grow organically. We anticipate that it will do this by utilizing its wide geographic and product diversity to attract new customers and enable it to generate positive free operating cash flow of about £10 million.
We could raise the rating if Hyperion can demonstrate a consistent improvement in its operating performance including organic revenue growth of high single digits along with a steady increase in EBITDA margins as the newly acquired companies, as well as the start-ups, integrate efficiently. We might also consider an upgrade if the group can improve its credit metrics so that they are in line with an “aggressive” financial risk profile, including adjusted debt to EBITDA of less than 5x.
We could lower the rating if increased competition and loss of key personnel were to stifle the group’s profitability and cash flow generation, which could result in negative free operating cash flow. We could also lower the rating if the group were to undertake a substantial debt-financed acquisition or if its financial policy became more aggressive than we currently consider it to be.
