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Rating Action:

Moody’s affirms Howden’s B2 corporate family rating; outlook stable

09 September 2021


London , September 9, 2021 - Moody's Investors Service ("Moody's") has today affirmed the B2 corporate family rating (CFR) of Howden Group Holdings (Howden) and the probability of default rating (PDR) at B2-PD. Moody's has also affirmed the B2 ratings on the guaranteed senior secured term loans issued by Hyperion Refinance S.a.r.l. (Hyperion Refinance) and HIG Finance 2 Limited, and affirmed the B2 rating on the £185 million guaranteed senior secured revolving credit facility. Concurrently, Moody's has assigned B2 ratings to the proposed new $415 million first lien USD term loan and €350 million first lien EUR term loan also issued by Hyperion Refinance S.a.r.l. (Hyperion Refinance) and HIG Finance 2 Limited. The outlooks on all issuers are stable.

The action follows Howden's announcement that it has entered into an agreement to acquire 100% of Align Financial Holdings (Align), a US based managing general agent. Howden expects to fund the acquisition through a combination of debt and roll-over equity. The transaction remains subject to regulatory approval and is expected to complete in October 2021.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

— CORPORATE FAMILY RATING —

The rating affirmation reflects Moody's view that, despite the meaningful increase in Howden's debt levels, which will weigh on the group's financial flexibility, leverage will improve steadily over the next 24 months as the group continues to grow its EBITDA base. The affirmation also reflects the complimentary nature and diversification of Align's business, which will enhance Howden's footprint and scale in the US market. The B2 CFR is supported by Howden's solid business profile, notably its strong diversification across business lines and geographic regions, its healthy EBITDA margins and a track record of revenue and EBITDA growth, which mitigates the pressure on leverage.

As part of the Align transaction, Howden is seeking to raise £859 million of debt and upsize its revolving credit facility (RCF) by £60 million to £185 million. The majority of the debt proceeds will be used in relation to the acquisition of Align, with £253 million placed into a locked account and £69m to pay down existing draw on the RCF and other transaction costs. Moody's expects that the locked account will be utilised over the next 24 months to fund further acquisitions and new hires, as well as to pay deferred consideration on past acquisitions.

The debt raise increases the group's total gross financial debt materially, to £2.4 billion from £1.6 billion. On a Moody's basis, which includes adjustments for operating lease obligations, deferred considerations, certain non-recurring costs and run-rate earnings from acquisitions, pro forma debtto-EBITDA is estimated at around 8.0x. Further adjusting for the locked account element (a portion of which will be used to repay some of the outstanding deferred consideration obligations), pro forma leverage is lower, slightly above 7.0x, which is high for the group's rating level.

Moody's expects that Howden will steadily reduce leverage by growing its EBITDA base via bolton acquisitions, organic growth including synergies related to recently acquired businesses, and through new hires. Nevertheless, if Howden's revenue and EBITDA expansion falls short of management forecasts and/or if the group further increases its gross debt, which may result in leverage, adjusted for the locked account, remaining elevated -above 7x- in the next 12-18 months, negative rating pressure may arise.

More positively, the acquisition of Align will further expand Howden's global footprint and strengthen the group's revenue and earnings diversification. The combined group will also have a stronger position within the US, the world's largest managing general agent market. Moody's also views Align's product offering, geographic focus and capacity providers as complementary to the group's existing business, and believes Howden will be in a good position to benefit from future revenue synergies.

However, despite the recent material expansion of the group's revenue and EBITDA, following completion of the A-Plan acquisition in March 2021, and the proposed acquisition of Align, the group's size remains modest compared to the three largest specialty brokers.

— DEBT AND PROBABILITY OF DEFAULT RATINGS —

The B2 rating assigned to the group's proposed senior secured USD and EUR term loans, which rank pari passu with the group's existing senior secured term loans and senior secured revolving credit facility, is in line with the B2 CFR.

This reflects the proposed largely senior secured debt structure with limited levels of deferred consideration and other debt obligations ranking behind the senior debt.

The B2-PD PDR is in line with the CFR and reflects Moody's assumption of a 50% recovery rate, which is standard for covenant-lite loan structures.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to a rating upgrade include: (i) debt-to-EBITDA ratio consistently below 5.5x; (ii) free-cash-flow-to-debt ratio consistently exceeding 6%; and (iii) EBITDA coverage of interest consistently exceeding 3.0x.

Factors that could lead to a rating downgrade include: (i) an unsuccessful execution of deleveraging plans, resulting in a sustained rise in debt-to-EBITDA above 7.0x; (ii) EBITDA coverage of interest consistently below 1.5x; and/or (iii) a material deterioration in the group's liquidity position.

LIST OF AFFECTED RATINGS

Issuer: Howden Group Holdings

..Affirmations:

....Long-term Corporate Family Rating, affirmed B2

....Probability of Default Rating, affirmed B2-PD

....Backed Senior Secured Revolving Credit Facility, affirmed B2

..Outlook Action:

....Outlook remains Stable

Issuer: HIG Finance 2 Limited

..Affirmations:

....Backed Senior Secured Term Loan, affirmed B2

..Assignment:

....Backed Senior Secured Term Loan, assigned B2

..Outlook Action:

....Outlook remains Stable

Issuer: Hyperion Refinance S.a.r.l.

..Affirmations:

....Backed Senior Secured Term Loans, affirmed B2

..Assignment:

....Backed Senior Secured Term Loan, assigned B2

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Insurance Brokers and Service Companies published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121967 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Helena Kingsley-Tomkins
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Simon James Robin Ainsworth
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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