Earlier this week, MarshBerry described how a robust high-yield bond market has been one of the keys to ensuring access to liquidity when commercial enterprises face a cash crunch. Despite the current economic marketplace, access to capital has not diminished as it had in 2008 and fixed-income markets have remained open to the key consolidators in the insurance distribution space. This has ensured that brokers have ample liquidity for operations and capital to deploy for acquisition growth opportunities. Access to non-investment grade bonds, or high-yield debt, has provided for the sustained consolidation witnessed within the insurance distribution sector over the past few months.
Perhaps less well articulated is the cost of this debt in driving insurance brokers to access additional funds. Debt capital was selectively available during the Great Recession, but at a rate that was often prohibitive to meeting hurdle rates and other lending thresholds unlike the attractive cost of capital today. In today’s environment, the availability of relatively cheap debt has allowed many public and private brokers to shore up their balance sheets. The coupon rates of these recent debt issuances vary, reflecting the inherent risk associated with an individual issuer’s future revenue and cash flow predictability, and solidity on an individual issuer’s capital structure. Even with this variability, the cost of debt in today’s marketplace, relative to the cost during the Great Recession, serve as a valuable guide to understanding the difference between the current dynamics of the fixed-income markets and those of the financial crisis in 2008.
Marsh & McLennan Companies, Inc. (“MMC”) issued $750 million of 10.5-year unsecured notes in May of this year with a 2.25% coupon and Baa1 (investment-grade debt) rating by Moody’s.1, 2 When compared to $400 million of notes issued at 9.25% in March of 2009, the dichotomy illustrates how dramatically different the lending environment has become.3 To be clear, issuing $750 million of debt at 7.0% lower cost when compared to March 2009 translates into a $52.5 million annual savings in interest expense annually. Assuming MMC does not retire these 10.5-year notes prior to maturity, the savings over the life of the notes is over $550 million. Furthermore, MMC exhibited a 2.39x Debt/EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) ratio and approximately $4.0 billion in outstanding debt in 1Q 19. In 1Q 20, MMC had a 2.86x Debt/EBITDA ratio and $15.9 billion in outstanding debt. MMC is now more highly levered, generally indicative of greater risk, and yet they received better pricing on their recent issuance.
Similarly, Aon plc (“Aon”) issued $1.0 billion of 10-year unsecured notes in May as well with a 2.80% coupon and Baa2 Moody’s rating.5 Like MMC, these notes are investment grade debt. In September 2010, Aon issued $300 million in A- (S&P) and BBB+ (Fitch) rated notes at 6.25%.6 While not as dramatic as the difference in MMC’s debt issuance costs, Aon still realizes a $34.5 million annual savings on $1 billion of debt from the 3.45% annual reduction in borrowing costs (or approximately $345 million over the 10-year life of the notes if Aon does not pre-pay or retire this debt prior to maturity). Exclusive of the impact of Aon’s coverage ratios, outstanding debt, and profitability, the observable difference in pricing further illustrated how debt financing has become easier to come by at much more favorable rates during the COVID-19 pandemic as compared to the financial crisis a decade prior.
Given the success that the public brokers have had in procuring affordable investment-grade debt of late, it should come as no surprise that several privately-held brokers have sought out favorable rates in the non-investment grade, high-yield bond market.
- Alliant Insurance Services, Inc. issued $300 million in unsecured notes at 6.75% with a Caa2 (non-investment grade) rating in April;
- NFP, Corp. had two subsequent issuances of $300 million in B2 senior secured notes at 7.00% and $1.25 billion in Caa2 senior unsecured notes at 6.88% in July.7, 8
While pricing information is not readily available for recent term loan issuances by AssuredPartners, Inc. (B2), BroadStreet Partners, Inc. (B2), Achilles Acquisition, LLC (OneDigital Health and Benefits parent) (B2), Ryan Specialty Group (B1), and USI Insurance Services, LLC (B2), we have generally observed such non-investment grade term loans to have floating rates priced at the London Interbank Offered Rate (LIBOR) plus 400 – 500 basis points (bps).9, 10 When compared to floating rate term loans issued prior to the impact of COVID-19, pricing has remained relatively stable relative to pre-COVID levels.9 So as capital has continued to flow from the fixed-income markets and brokers take advantage of historically low interest rates, some optimism is understandable in the face of otherwise considerable economic headwinds.
If you have questions about Today’s ViewPoint or would like to learn more about the debt market, please email or call Gerard Vecchio, Senior Vice President at 212.972.4886.
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9Moody’s Investor Services
10FIG Leveraged Finance Market Overview. Bank of America. May 4, 2020