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Rating Action:

Moody's affirms Willis's ratings (senior at Baa3) following Q4 charges; outlook stable

Global Credit Research - 20 Dec 2012

Approximately $2.1 billion of rated securities outstanding

New York, December 20, 2012 -- Moody's Investors Service has affirmed the Baa3 guaranteed senior unsecured debt rating of Willis Group Holdings plc (NYSE: WSH; together with its subsidiaries, Willis) following the company's announcement of Q4 2012 charges totaling nearly $1 billion. The charges include a goodwill impairment related to Willis's North American unit and other charges related to a change in its remuneration policy. The rating affirmation reflects Willis's strong market presence, its stated intention to reduce financial leverage, and the non-cash nature of the Q4 charges. Moody's also assigned a provisional (P)Baa3 guaranteed senior unsecured rating to Willis's shelf registration. Proceeds from the sale of securities off the shelf will be used for general corporate purposes, including working capital, debt repayment, capital expenditures and possible acquisitions. The rating outlook for Willis is stable.

RATINGS RATIONALE

On 19 December, Willis announced a Q4 goodwill impairment charge estimated at $450-$500 million (after taxes). The charge, which the company foreshadowed as part of its Q3 earnings announcement, reflects challenges within the North American business following Willis's 2008 acquisition of Hilb Rogal & Hobbs Company (HRH). Total goodwill in the North American unit amounted to $1.8 billion as of September 30, 2012.

Willis also announced a change in its remuneration policy whereby it will replace annual cash retention awards (which included a repayment requirement for departing employees under certain circumstances) with annual cash bonuses (with no such repayment requirement). The policy change calls for a write-off of approximately $205 million (pretax) of unamortized cash retention awards as well as an accrual of approximately $250 million (pretax) for cash bonuses to be paid in 2013. Both charges will be recorded in Q4.

"The charges announced by Willis are one-time in nature and have minimal impact on the company's projected cash flow," said Bruce Ballentine, Moody's lead analyst for Willis. "Still, the announcement suggests that Willis's credit profile has weakened over the past few years." The goodwill impairment indicates that the profit outlook for the North American unit has declined since the time of the HRH acquisition. The change in remuneration policy will likely lead to higher salary and benefit costs, because Willis will accrue bonuses to be paid in the year ahead rather than amortizing awards paid in years past.

Willis's ratings reflect its strong market position in global insurance brokerage along with its healthy profit margins and free cash flow. These strengths are offset by financial leverage and fixed charge coverage metrics that are weak for the rating category, and by exposure to errors and omissions, a risk inherent in professional services. For the 12 months through September 2012, the company's adjusted debt-to-EBITDA ratio was about four times (per Moody's calculation, which incorporates standard accounting adjustments). The rating agency expects Willis to reduce this ratio to the mid-three range over the next 12-18 months through a combination of EBITDA growth and debt repayment.

Moody's cited the following factors that could lead to a rating upgrade for Willis: (i) continued strong operating margins above 20%, (ii) adjusted (EBITDA -- capex) coverage of interest in mid-single-digits or higher (times), and (iii) adjusted debt-to-EBITDA ratio below 2.8x.

The rating agency added that the following factors could lead to a rating downgrade: (i) deterioration in operating margins to less than 15%, (ii) adjusted (EBITDA - capex) coverage of interest below 3x, or (iii) adjusted debt-to-EBITDA ratio above 3.5x on a sustained basis.

Moody's has affirmed the following ratings a stable outlook:

Willis Group Holdings plc -- backed senior unsecured debt Baa3,

Willis North America Inc. -- backed senior unsecured debt Baa3.

Moody's has assigned the following provisional ratings a stable outlook:

Willis Group Holdings plc -- backed senior unsecured shelf (P)Baa3,

Willis North America Inc. -- backed senior unsecured shelf (P)Baa3.

The principal methodology used in this rating was Moody's Global Rating Methodology for Insurance Brokers & Service Companies, published in February 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Willis is a global insurance broker, developing and delivering professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. The company reported total revenues of $2.6 billion and net income attributable to Willis of $359 million for the nine months ended September 30, 2012. Equity attributable to Willis was approximately $2.7 billion as of September 30, 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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

Robert Riegel
MD - Insurance
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

Moody's affirms Willis's ratings (senior at Baa3) following Q4 charges; outlook stable
No Related Data.

 

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