Ardonagh downgraded following £2bn refinancing deal

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But rating agency Fitch says it expects the broking group to continue to improve its EBITDA margin amidst the potential for increased cost savings as a result of its latest round of acquisitions, as well as a return to ’healthy’ free cash flow

Ardonagh’s Long Term Issuer Default Rating has been downgraded to B- by Fitch Ratings following the broking group’s £2bn refinancing deal, which will enable the business to fund the acquisitions of Bravo Group and Arachas, as well as Bennett’s Motorcycling Services.

Fitch pointed to increased debt on Ardonagh’s capital structure as a reason for the downgrade.

The downgrade from the previous B rating means that Ardonagh now has a rating in line with the likes of US broking groups NFP, Hub International, Accrisure, Alliant and USI.

The ratings agency said that Ardonagh’s outlook following the downgrade is stable, and it also assigned a ‘CCC(EXP)’ rating to the proposed £400m equivalent US dollar-denominated senior PIK (payment-in-kind) toggle notes due 2026, with Ardonagh having the ability to defer interest payments on these PIK bonds.

Fitch said in a report on the downgrade: “The Stable Outlook reflects our expectation that continued cost savings, synergies and healthy free cash flow (FCF) will all support sufficient organic deleveraging.

”With a new revolving credit facility and new delayed draw facilities both expected to be undrawn at closing we expect Ardonagh to have good liquidity.”

Meanwhile, Blair Jacobson, partner and co-head of European credit at Ares Management, the lead arranger for the re-financing deal, said: “We believe this is the largest ever unitranche financing transaction globally, which is a testament to the quality of The Ardonagh Group, our long-standing relationships with HPS Investment Partners and Madison Dearborn Partners and the advantages created by our global and scaled platform

“We believe there is a significant need in the current market to serve as a partner to companies in need of scaled financial solutions and are excited to support Ardonagh in realising its growth ambitions.”

And Luis Mayans, partner and deputy head, private debt at Caisse de dépôt et placement du Québec (CDPQ) added: “Over the years, Ardonagh has developed an attractive business model by bringing together specialised insurance brokerages that are leaders in their respective niches, and we’re pleased to offer them a financial solution that meets their needs.”

Acquisitions Increase Leverage

In its report detailing the downgrade, Fitch said that the new capital structure will lead to a “material increase in debt”, with the ratings agency calculating Ardonagh’s funds from operations (FFO) gross leverage for 2021, the first full financial year after the acquisitions, at 9.5x.

The ratings agency added that Ardonagh’s FFO gross leverage is expected “to remain above 7.0x for at least three years under our assumptions”, something that Fitch said is “above our thresholds for the previous B rating”.

Ardonagh, however, commonly reports its EBITDA on a Pro Forma Adjusted basis to take into account acquisitions and strip out exceptional costs.

Fitch, meanwhile, does not take into account these cost adjustments when calculating its ratings.

On this basis, Ardonagh generated total pro forma Income of £814.2m and total pro forma adjusted EBITDA of £275.5m for the 12 months to 31 March 2020, meaning that its adjusted leverage would be around 7.0x.

Additional Cost Savings Anticipated

Despite the increase in debt at Ardonagh, Fitch also recognised the continued margin growth delivered by the broking group as it continues to realise cost savings across the business.

“Ardonagh has made good progress in its £30m, annualised cost-saving programme, with £11m already implemented as of 31 March 2020,” Fitch said in its report.

“We expect the acquisitions announced today and the proposed acquisitions of Bennetts announced on 17 February 2020 to deliver further cost savings of up to £7m by 2022.”

The ratings agency said that it was also “conservatively” predicting Ardonagh’s EBITDA margin to increase to 31% by 2022 from 26% in 2019.

“The insurance broking market remains highly fragmented and we expect the company to continue pursuing opportunistic, EBITDA accretive bolt-on acquisitions,” Fitch added.

Fitch also expects the broking group’s free cash flow to improve over the coming years, predicting “FCF to return to positive levels with high mid-single digit FCF margins expected from 2021 onwards” as Ardonagh cuts back its transformation spending and reaches the end of its regulatory repayments.