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Announcement:

Moody's affirms Aon's ratings; outlook to negative

12 Jul 2010

Approximately $2 billion of existing securities affected.

New York, July 12, 2010 -- Moody's Investors Service has affirmed the ratings of Aon Corporation (Aon -- senior unsecured debt rated Baa2, NYSE: AON) and changed the rating outlook to negative from stable following the announcement that Aon plans to acquire Hewitt Associates, Inc. (Hewitt -- not rated, NYSE: HEW), a global leader in human resource consulting. Total consideration will be approximately $4.9 billion, consisting of 50% cash and 50% Aon common stock. The negative rating outlook reflects the large amount of debt in the funding structure and the execution risk in such a large transaction, given that the purchase price amounts to about half of Aon's market capitalization as of June 30, 2010, and includes a substantial premium to Hewitt's current market value. The transaction is subject to regulatory, stockholder and other approvals and is expected to close during the fourth quarter of 2010.

"The proposed transaction would sharply expand Aon's capabilities in human resource consulting and outsourcing," said Bruce Ballentine, Moody's lead analyst for Aon, "and it would give the company a more balanced mix of insurance brokerage and consulting revenues." The revenue mix would shift to about 60% brokerage and 40% consulting for the combined firm, versus about 83%/17% for Aon alone during 2009. The transaction would also improve the quality of earnings within Aon's consulting segment, given that much of Hewitt's revenue comes from multi-year outsourcing contracts. Over the longer term, the transaction may generate cross selling opportunities among clients of the two firms.

Negative aspects of the transaction, from a credit perspective, include the large amount of debt financing and the potential for business disruptions during the integration phase. "The proposed funding structure would more than double Aon's debt burden and reduce its financial flexibility, at least in the near term," said Mr. Ballentine. Aon reported total debt of $2.1 billion as of March 31, 2010, and the acquisition financing would add about $2.5 billion to that amount. The overall funding for the deal would include approximately $2.5 billion of newly issued Aon stock, a $1 billion three-year bank term loan and a $1.5 billion bridge loan facility expected to be replaced with a $1.5 billion unsecured note offering.

Aon's adjusted debt-to-EBITDA ratio for continuing operations, as measured by Moody's, was about 3.7x for the 12 months through March 2010. Moody's estimates that the incremental adjusted debt associated with the Hewitt transaction amounts to more than 4x the incremental adjusted EBITDA to be acquired, and that the pro forma debt-to-EBITDA ratio immediately after the acquisition will be in the range of 3.5x-4x. The rating affirmation incorporates Moody's expectation that Aon will reduce its adjusted debt-to-EBITDA ratio below 3.5x within 12 months following the acquisition.

The rating agency noted that Aon's earnings have been constrained by a series of restructuring charges over the past few years, and this pattern is likely to continue in connection with the Hewitt acquisition. Large mergers often lead to headcount reductions, transitions to new business systems and other restructuring initiatives that can disrupt workforce productivity and client service. Aon's recent experience in integrating the operations of Benfield Group Limited, acquired in 2008, could prove helpful in this regard, said Moody's.

Moody's cited the following factors that could lead to a stable rating outlook for Aon: (i) smooth integration of the Hewitt operations, (ii) adjusted debt-to-EBITDA ratio below 3.5x, (iii) insurance brokerage margins consistently in the high teens or low 20s (percent), and (iv) adjusted (EBITDA -- capex) coverage of interest steadily above 5x.

The rating agency added that the following factors could lead to a rating downgrade: (i) significant business or financing disruptions related to the Hewitt acquisition, including any difficulty in issuing unsecured notes prior to drawing on the bridge loan facility, (ii) adjusted (EBITDA -- capex) coverage of interest below 4x, or (iii) adjusted debt-to-EBITDA ratio remaining above 3.5x for up to a year after the Hewitt acquisition.

Moody's last rating action on Aon took place on June 24, 2009, when a Baa2 rating was assigned to EUR 500 million of five-year notes issued by Aon Financial Services Luxembourg S.A., based on a guarantee from Aon.

Based in Chicago, Aon is a global professional services firm with subsidiaries offering risk management services, insurance and reinsurance brokerage, and human capital consulting through some 500 offices in more than 120 countries. Aon reported total revenue of $1.9 billion and net income of $178 million for the first quarter of 2010. Total Aon stockholders' equity was $5.4 billion as of March 31, 2010.

The principal methodology used in rating Aon was Moody's Global Rating Methodology for Insurance Brokers & Service Companies, published in January 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Moody's has affirmed the following ratings and changed the outlook to negative from stable:

Aon Corporation -- senior unsecured debt at Baa2, subordinated debt at Baa3, commercial paper at Prime-2, senior unsecured shelf at (P)Baa2, subordinated shelf at (P)Baa3, preferred shelf at (P)Ba1;

Aon Finance N.S.1, ULC -- backed senior unsecured debt at Baa2;

Aon Financial Services Luxembourg S.A. -- backed senior unsecured debt at Baa2.

For more information, please visit our website at www.moodys.com/insurance.

New York
Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Aon's ratings; outlook to negative
No Related Data.
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