Sedgwick Inc. #B# Rating Affirmed, Removed From CreditWatch, Outlook New Debt Rated

Stocks and Financial Services Press Releases Tuesday December 12, 2017 10:20
NEW YORK--12 Dec--S&P Global Ratings

NEW YORK (S&P Global Ratings) Dec. 11, 2017-- S&P Global Ratings said today it affirmed its 'B' long-term issuer credit rating on Sedgwick Inc. and Sedgwick Claims Management Services Inc. and removed the ratings from CreditWatch Negative, where they were placed Dec. 6, 2017, following Sedgwick's announcement that it entered into a purchase agreement to acquire Cunningham Lindsey, a global loss-adjusting, claims-management, and risk-solutions company.

At the same time, we assigned our 'B' debt rating to Sedgwick's proposed incremental $735 million (fungible) first-lien term loan due 2021, with a '3' recovery rating, indicating our expectation of meaningful (rounded estimate: 65%) recovery in the event of a payment default. We also assigned our 'CCC+' debt rating to Sedgwick's proposed $200 million (nonfungible) second-lien term loan due 2022, with a '6' recovery rating, indicating our expectation of negligible (rounded estimate: 5%) recovery in the event of a payment default.

The stable outlook on Sedgwick Inc. reflects our expectation that favorable U.S. employment conditions combined with the company's high client retention, new client wins, and increased product/service cross-selling will drive mid-single-digit revenue growth, with revenues reaching close to $2.7 billion in 2018 and $2.8 billion in 2019. Sedgwick's adjusted EBITDA margins in the high double digits, blended with Cunningham Lindsey's adjusted EBITDA margins in the low-to-mid double digits will yield combined EBITDA margins in the 17%-18% range for 2018-2019. We expect the company to use discretionary free cash flows of $80 million-$100 million in 2018-2019 for a mix of acquisitions and debt repayment, leading to adjusted leverage of close to 7x by year-end 2018 and 6x-6.5x by year-end 2019. Adjusted EBITDA interest coverage will be 2x-2.5x in 2018-2019.

We could lower our ratings during the next 12 months if Sedgwick's credit profile were to deteriorate due to intense competitive pressure, revenue and client losses, higher-than-expected operating costs, acquisition/integration issues, and/or further meaningful debt issuance. Key downgrade parameters could include lower-than-expected earnings with adjusted EBITDA margins approaching the low end of 10%-20%, higher sustained adjusted leverage (above 8x) and/or lower sustained EBITDA interest coverage (below 2x).

Given the rating affirmation, we are unlikely to raise the rating in the next 12 months. However, we would consider an upgrade beyond this time frame if the company further grows and diversifies its business and improves its EBITDA margins. In addition, we would consider an upgrade if the company demonstrates a less-aggressive financial policy with lower sustainable leverage (below 5x) and higher EBITDA interest coverage (at the high end of 3x-4x).

  • We are assigning our 'B' issue-level rating with a '3' recovery rating (rounded estimate: 65%) to Sedgwick's proposed $735 million incremental (fungible) first-lien term loan due 2021, and our 'CCC+' issue-level rating with a '6' recovery rating (rounded estimate: 5%) to the proposed $200 million incremental (nonfungible) second-lien term loan due 2022.
  • We have valued the company on a going-concern basis using a 6x multiple (at the high end of our general 5x-6x range for insurance services companies) over our projected emergence EBITDA because of Sedgwick's stronger business risk profile compared with most TPA and health care services peers.
  • Our simulated default scenario contemplates a payment default in 2020 arising from intense competition leading to client losses, significantly lower revenue, and/or higher-than-expected operating costs.
  • We believe lenders would achieve the greatest recovery value through reorganization rather than liquidation of the business.
  • We assume that under the new capital structure, Cunningham Lindsey's domestic subsidiaries will become guarantors of Sedgwick's debt, while the foreign subsidiaries will be nonguarantors (but with 65% equity pledges).
  • Simulated year of default: 2020
  • EBITDA at emergence: $275 million
  • EBITDA multiple: 6x
  • Gross recovery value: $1.65 billion
  • Net recovery value for waterfall (after 5% administrative expenses): $1.57 billion
  • Obligor/non-obligor split: 83%/17%
  • Total collateral value available: $1.47 billion
  • Value available to unsecured claims: $93 million
  • Total collateral value available to secured debt: $1.47 billion
  • Total first-lien debt: $2.22 billion
  • Total (collateral + deficiency) first-lien recovery: 50%-70% (65% rounded estimate)
  • Implied recovery rating: '3'
  • Total collateral value available to second priority debt: $0.0 billion
  • Value available to unsecured claims: $93 million
  • Total second-lien debt: $870 million
  • Total unsecured claims: $1.6 billion
  • Total (collateral + deficiency) second-lien recovery: 0%-10% (5% rounded estimate)
  • Implied recovery rating: '6'

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