Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for Aon plc (Aon) and related entities at 'BBB+'.
The Rating Outlook is Stable. Fitch also affirmed senior unsecured notes issued by three of its subsidiary entities - Aon Corporation, Aon Global Holdings plc and Aon Global limited - at 'BBB+'. The Short-Term IDR and CP issued by Aon Corporation and Aon Global Holdings plc were each affirmed at 'F2'.
The IDR and security ratings impact approximately $10.4 billion of debt outstanding as of June-22, not including unused capacity under the company's $1.75 billion multi-currency, senior unsecured revolving credit facilities.
Fitch has also withdrawn Short-Term IDRs on Aon plc and Aon Global Limited as these issuers are not borrowers on the company's two CP programs and the IDRs are no longer considered by Fitch to be relevant to the agency's coverage.
Key Rating Drivers
Strong Market Position: Fitch views Aon's market position as a credit positive, with the company acting as a global leader in many of its end markets. The company has diverse operations in HR and employee benefits consulting, insurance/reinsurance brokerage and benefits administration. Aon is often cited as the second largest insurance broker globally. Its strong market share enables the company to compete for business on a global basis and help its multi-national clients navigate employee and insurance-related issues beyond national borders. The insurance brokerage and benefits consulting industries are fragmented but Aon has maintained and grown its leadership role over the past two decades.
Stable Business Model: Fitch believes the company operates a fairly predictable business model in an industry that performs well throughout the economic cycle. Parts of its business include project-based and consulting work that is more cyclical, but this is balanced against the more stable insurance operations. Aon grew revenue organically each year since 2007, except for a modest decline during 2009, and also grew during the 2020 coronavirus pandemic. Revenue and earnings are well diversified by customers although there is some geographic concentration, with the U.S. and U.K. comprising 45% and 14% of 2021 revenue, respectively. The company is also meaningfully diversified by services offered although insurance and reinsurance solutions comprise roughly 70% of revenue.
Strong Financial Flexibility: Fitch views Aon's financial flexibility as a credit positive. Its disciplined capital management strategy provides ample ability to access the capital markets, to reinvest in its business and to capitalize on growth opportunities. The company generated more than $1.0 billion of post dividend FCF each year since 2013, except for 2017, which was negatively impacted by unique one-time payments related to divestitures. The company also has a sizeable unrestricted cash and investments balance ($830 million at June 2022) and access to additional liquidity via multiple revolving credit facilities and both USD and multicurrency European CP programs.
Stable Financial Leverage: Fitch views Aon's gross leverage as reasonable for the rating category, with Fitch-calculated gross debt/EBITDA near 2.4x at June 2022. Gross leverage was relatively stable historically and near 2.0x for the past five years (sub-2.0x for much of the earlier part of the current cycle, or 2007-2014). Fitch believes management is committed to a strong investment grade rating and could remain near low/mid-2.0x over the ratings horizon, although M&A could be a factor leading to higher leverage over time.
Aon's ratings reflect the company's strong competitive position as one of the global leaders in insurance brokerage and HR, retirement & employee benefits consulting, moderate financial leverage, good financial flexibility with a strong cash flow generation profile, and historically strong profits and margins. It is materially larger by revenue and EBITDA than lower-rated Arthur J. Gallagher & Co. (BBB/Positive) and Willis Towers Watson plc (BBB/Positive) and is smaller than Marsh & McLennan Companies, Inc. (MMC; A-/Stable). Gross leverage in recent years in the low-2.0x range was lower than Willis Towers and AJG, while above that of MMC. Fitch believes Aon's strong share position, solid margins and cash flows, strong performance through the cycle and moderate leverage position the rating well at the 'BBB+' rating category relative to Fitch-rated peers in the insurance brokerage and business services industries.
Revenue growth in the low- to mid-single digits range per year, or similar to recent trends.
EBITDA margins improve 30-40 basis points per year, benefiting from 45% incremental margins on higher revenue (below historical average).
Capex increases modestly to 1.5%-1.75% of revenue over the ratings horizon.
Fitch assumes share buybacks remains the primary use of excess cash flows, with dividends also increasing in the high-single digit range per year in the next few years.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross leverage, Fitch-defined as total debt with equity credit/operating EBITDA, sustained below 2.25x could lead Fitch to upgrade the rating;
Sustained improvements to operating fundamentals, including revenue growth or EBITDA/FCF margins, could also lead Fitch to reassess the rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross leverage expected to remain above 2.75x;
Deterioration in operating fundamentals that leads to weaker revenue trends, margin underperformance, compression of cash flows, etc.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Aon is well positioned from a liquidity perspective, which is unlikely to change in the coming years. The company has multiple sources for liquidity including: (i) $830 million of unrestricted cash and investments as of June 2022; (ii) strong post-dividend FCF generation, which ranged from $1.1 billion to $2.2 billion per year from 2018-2021; (iii) full capacity under its $1.75 billion multi-currency revolving credit facilities, and (iv) capacity on its USD and EUR CP programs.
Debt Profile: Aon is a well-established investment-grade borrower, with strong access to the debt capital markets both in the U.S. and abroad. The majority of the company's debt outstanding consists of fixed-rate, senior unsecured notes, but the company also has two multicurrency revolving credit facilities in place, as well as two commercial paper programs. It has a well laddered maturity structure that ranges from 2022-2052. Fitch expects Aon will continue to conservatively manage its balance sheet with a keen eye to staggered debt maturities and various forms of unsecured financing.
Fitch views the 8.205% junior subordinated notes as 'hybrid' instruments, given the ability for the company to defer the semiannual interest payments for a period up to 10 consecutive semi-annual periods (five years). Fitch applies its Corporate Hybrids Treatment and Notching Criteria to the subordinated notes, and assumes 0% equity recognition. The issue-level rating for the junior sub debt is notched two notches below the IDR to 'BBB-' to reflect the deeply subordinated status of the debt instruments and ability to defer interest payments for up to five years.
Aon is one of the largest global insurance brokerage and professional financial services fi rms, providing a broad range of risk, retirement and health solutions in more than 120 countries. The company is publicly traded on the NYSE under the ticker 'AON'.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.