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Rating Action:

Moody's affirms Aon's ratings (senior Baa2) following agreement to sell benefits administration and HR BPO platform; outlook stable

10 Feb 2017

Approximately $6 billion of rated debt

New York, February 10, 2017 -- Moody's Investors Service has affirmed the Baa2 guaranteed senior unsecured debt rating of Aon plc (NYSE: AON) following the company's announcement that it will sell its benefits administration and HR business process outsourcing (BPO) platform to Blackstone for cash consideration of $4.3 billion at closing and additional consideration of up to $500 million based on future performance. Aon's after-tax cash proceeds will be approximately $3 billion. The companies expect to complete the transaction by the end of Q2 2017, pending customary closing conditions. The rating outlook for Aon is stable.

RATINGS RATIONALE

The proposed sale will reduce Aon's revenue by nearly 20%, and its EBITDA and free cash flow to a lesser extent, while leaving debt unchanged. This will increase the company's debt-to-EBITDA ratio, at least for the next few quarters, a credit negative. However, Moody's expects that Aon will allocate a portion of the sale proceeds to EBITDA-enhancing acquisitions in the areas of risk, retirement and health, which will gradually reduce the debt-to-EBITDA ratio. Aon completed acquisitions worth about $1 billion in 2016. The company will also allocate substantial sale proceeds to repurchase common stock. While announcing the divestiture, Aon said it increased its share repurchase authorization by $5 billion to a total of $7.7 billion. There is no time limit on this authorization, and past authorizations have covered a few years' worth of share buybacks.

Aon's strategic rationale for the divestiture is to shift resources away from administrative and processing activities toward advice and solutions driven by proprietary data and analytics. The operations being sold have lower profit margins and higher capital expenditure requirements (relative to revenue and earnings) than Aon's ongoing businesses. Over time, the divestiture and reinvestment will lead to stronger profit and cash flow metrics for Aon.

Aon's ratings reflect its global market presence; diversification across clients, products and regions; and expertise in providing risk and human resources solutions to middle-market, national and global clients. Aon has achieved healthy profit margins over the past several years under a variety of market conditions. Tempering these strengths are the expected jump in financial leverage following the divestiture along with the company's heavy emphasis on payments to shareholders. Other challenges facing Aon and its peers include soft pricing in certain business lines, notably reinsurance; low market interest rates, which put upward pressure on pension obligations; and potential liabilities arising from errors and omissions.

Moody's expects Aon to maintain good access to capital markets, with a debt-to-EBITDA ratio in the range of 3x to 3.5x and (EBITDA - capex) coverage of interest in the range of 5x to 7x. Aon's leverage ratio was at the low end of this range at year-end 2016. The leverage will likely rise somewhat above the range upon closing of the divestiture, and then decline back into the range as Aon grows EBITDA organically and through acquisitions. These metrics incorporate Moody's standard accounting adjustments for pensions and leases.

Moody's cited the following factors that could lead to a rating upgrade for Aon: (i) debt-to-EBITDA ratio below 2.5x, (ii) (EBITDA - capex) coverage of interest consistently above 6x, and (iii) net profit margin consistently above 9%.

The rating agency added that the following factors could lead to a downgrade: (i) debt-to-EBITDA ratio remaining above 3.5x, (ii) (EBITDA - capex) coverage of interest below 4x, or (iii) net profit margin below 6%.

Moody's has affirmed the following ratings:

Aon plc (guaranteed by Aon Corporation) -- backed senior unsecured debt Baa2, backed senior unsecured shelf (P)Baa2, backed subordinated shelf (P)Baa3, backed commercial paper Prime-2;

Aon Corporation (guaranteed by Aon plc) -- backed senior unsecured debt Baa2, backed junior subordinated debt Baa3 (hyb), backed senior unsecured shelf (P)Baa2, backed subordinated shelf (P)Baa3, backed commercial paper Prime-2;

Aon Finance N.S.1, ULC (guaranteed by Aon plc and Aon Corporation) -- backed senior unsecured debt Baa2.

The rating outlook for these issuers is stable.

The principal methodology used in these ratings was Insurance Brokers and Service Companies published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Domiciled in the UK, Aon is a leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services to clients in more than 120 countries. Aon generated total revenue of $11.6 billion and net income attributable to Aon of $1.4 billion in 2016. Aon shareholders' equity was $5.5 billion at year-end 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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