London, 14 April 2014 -- Moody's Investors Service has today assigned a B1 corporate family
rating (CFR) and B2-PD probability of default rating (PDR) to Saga
Limited (Saga or the company). Concurrently, Moody's
has assigned a provisional (P)B1 rating to the GBP825 million Term Loan
A due 2019, GBP425 million Term Loan B due 2020, and GBP150
million Revolving Credit Facility due 2019 (together the senior bank facilities),
all issued by Saga MidCo Limited, a subsidiary of Saga. The
outlook on the ratings is stable. This is the first time Moody's
has assigned a rating to the company.
Moody's issues provisional ratings in advance of the final funding of
the facilities and these ratings reflect Moody's preliminary credit opinion
regarding the transaction only. Upon a conclusive review of the
final documentation, Moody's will endeavour to assign a definitive
rating to the facilities. A definitive rating may differ from a
provisional rating.
RATINGS RATIONALE
"Saga's B1 CFR reflects the company's strong brand recognition
among its target population, the extensive Group Marketing Database
facilitating product cross-selling, its stable renewal rates
for home and motor insurance, and the good track record of AICL,
the company's underwriting business", says Sebastien
Cieniewski, Moody's lead analyst for Saga. The rating
is weakly positioned in the B1 category due to Saga's relatively
small scale in all its segments, the profound competitiveness of
the UK insurance market, which has led to unsustainable pricing
pressure in the recent past, modest growth prospects for its end-markets,
and the high adjusted leverage ratio at around 5.6x at the closing
of the refinancing (based on underlying pro-forma GBP222 million
EBITDA as reported by the company) with limited deleveraging capability.
Despite its revenues of approximately GBP1.2 billion, Saga
is a relatively small player in the markets where it operates as it focuses
only on the over 50s population. For example, Saga only holds
less than 2% market share of the UK motor and home insurance markets.
In addition, despite the relative diversification of revenues between
travel, healthcare, and financial services, the latter
generates most of the company's earnings (84% of group EBITDA
in fiscal year (FY) 2014).
In this niche market, Saga benefits from a strong brand which the
company has leveraged over time to extend its product offering --
having started operating as a travel business, Saga has diversified
its operations to financial services, including insurance,
and more recently healthcare. In addition, high customer
satisfaction has facilitated product cross-selling. Targeted
marketing through Saga's extensive Group Marketing Database and
cross-selling have contributed to sustain higher margins compared
to most of its peers thanks to reduced customer acquisition costs.
However, the markets where Saga operates are highly competitive,
in particular the UK motor and home insurance markets - a credit
negative. Competition in these markets has been exacerbated over
the last couple of years by the increasing penetration of online aggregators
facilitating price comparison for customers. This has in turn led
to pressure on premiums as well as increased churn of policyholders.
Despite the increasing pressure, Saga has remained relatively resilient
with stable customer retention rates for both the motor and home insurance
products thanks in part to its strong brand, lower penetration of
online aggregators among its target population, and increased loyalty
through cross-selling.
In addition, we positively view Saga's prudent motor underwriting
operations which have supported group profitability during a challenging
period, particularly between FY2009 and FY2011, when excessive
price competition, claims farming, and the rise of bodily
injury claims resulted in loss-making activities for most of the
players in the UK insurance market. Saga underwriting arm's
pricing discipline and recurring reserve releases have led to the group
showing better combined operating ratios relative to most peers.
However, we also note that in this particularly competitive environment,
this strategy has resulted in loss of volume of insurance policies --
for example motor policyholders have decreased to 2.7 million as
of January 2014 compared to close to 3 million in January 2012.
Saga's adjusted leverage ratio is high at 5.6x based on fiscal
year 2014 underlying pro-forma EBITDA of GBP222.4 million
(pro forma mainly for the Ruby ship retirement in January 2014).
We do not anticipate significant deleveraging over the rating horizon
because of the relatively mature nature of markets in which Saga operates,
as well as the intense price competition that is limiting returns in the
UK motor and home insurance industry. The decent projected free
cash flow generation of around 6%-7% per annum over
the period FY2015-2017 partly mitigates the weak deleveraging on
a gross basis.
Saga's liquidity position is solid. Liquidity is supported
by the projected positive free cash flow (FCF) generation which benefits
from intrinsically negative working capital. In addition,
capex requirements, mainly related to the company's travel
segment, are modest, averaging 2% of revenues per annum.
Saga's liquidity also gets support from an undrawn GBP150 million
RCF and a pro forma unrestricted cash balance of GBP52 million as of the
closing of the transaction. A significant portion of the group's
cash is ring-fenced from the rest of the group because of regulation,
including AICL, travel, and part of the healthcare segments,
and is therefore restricted.
Saga's PDR of B2-PD, which is one notch below the CFR,
reflects our assumption of a 65% family recovery rate as is customary
for capital structures, including senior bank debt only with maintenance
covenants. The Term Loan A, Term Loan B, and revolving
credit facility rank pari passu but are junior to a maximum of GBP32.5
million of super senior pension debt. The senior bank facilities
benefit from only limited guarantees in the absence of guarantees provided
by the regulated entities including Saga's underwriting and travel
businesses. We have assigned a (P)B1 rating to the Term Loan A,
Term Loan B, and RCF, at the same level as the CFR,
due to the relatively small amount of super senior pension liabilities
and other non financial debt liabilities at the operating companies ranking
ahead. The senior bank facilities are subject to financial covenants
(leverage and interest cover) with a 30% headroom set at the closing
of the transaction.
Saga's stable outlook reflects our expectation that the company
will continue to enjoy high renewal rates and stable margins in its insurance
business, which will allow it to generate free cash flow above 5%
of adjusted gross debt. Upward rating pressure could develop if
Saga (1) decreases its leverage towards 4.5x on a sustainable basis;
(2) improves its FCF/debt well above 10%; and (3) maintains
a conservative financial policy with ample liquidity cushion. Downward
rating pressure could develop if (1) the company's leverage increases
towards 6x; (2) FCF/debt decreases to below 5% on a sustained
basis; and/or (3) motor and home insurance renewal rates weaken.
The principal methodology used in these ratings was the Global Business
& Consumer Service Industry Rating Methodology published in October
2010. Other methodologies used include Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009. Please see the Credit Policy page
on www.moodys.com for a copy of these methodologies.
Headquartered in Folkestone, UK, Saga provides a range of
branded products for the over-50s consumer segment in the UK.
Saga's operations span mainly across financial services (44%
of FY 2014 group revenues and 88% of group EBITDA), which
include motor (2.7 million policies) and home insurance (1.9
million policies), travel (28% of revenues and 9%
of EBITDA) with a packaged and cruise holidays offering, and healthcare
(27% of revenues and 5% of EBITDA) specialised in private
domiciliary care services. Saga reported revenues of GBP1,209
million and underlying pro-forma EBITDA of GBP222 million for fiscal
year ended January 2014. The company is owned by Acromas BidCo
Limited whose ultimate shareholders are Charterhouse Capital partners
(35.8% ownership), CVC Capital Partners (19.9%),
Permira Advisers (19.9%), employees (20.2%)
and other co-investors (4.2%). Consolidated
audited accounts will be produced at the level of Saga Limited,
which is the top entity within the bank group.
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 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 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 rating action, and
whose ratings may change as a result of this 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.
Sebastien Cieniewski
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Chetan Modi
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns B1 CFR to Saga Limited; stable outlook
