TEXT-S&P rates Confie Seguros Holding II Co. 'B-';otlk stable

Tue Nov 6, 2012 8:27am EST

Nov 06 -

Overview

-- Confie Seguros is seeking to enter new senior secured first-lien and second-lien credit facilities to finance the buyout from its existing equity owners.

-- We are assigning a 'B-' corporate credit rating, and rating the company's proposed credit facilities.

-- The stable outlook reflects our view that Confie Seguros will continue its successful opportunistic growth strategy.

Rating Action

As previously announce, on Nov. 1, 2012, Standard & Poor's Ratings Services assigned its 'B-' long-term counterparty credit rating to Confie Seguros Holding II Co. We also rated the company's proposed $252 million senior secured first-lien term loan B facility maturing six years from the facility closing date, and its committed $75 million senior secured first-lien revolving credit facility expected to mature five years from the close of the facility 'B-'. In addition, we rated the company's $110 million senior secured second-lien term loan facility maturing in six and one-half years from the facility close 'CCC'.

We have assigned a recovery rating of '3', representing meaningful (50%-70%) recovery expectations to the pending first-lien secured credit facilities. A recovery rating of '3' does not provide any support notching to the underlying issue rating. We also assigned a recovery rating of '6' to the second-lien secured term loan facility, which provides potential debt holders a negligible (0%-10%) expectation of recovery in a default scenario.

Rationale

The corporate credit rating on Confie Seguros reflects its high leverage and weak financial flexibility in respect to its fixed-charge coverage requirements. The company's operating performance--specifically, its sustained profitability--same-store/organic policy growth rates, revenue composition, and historically robust cash-flow generation capabilities from EBITDA partially offset the weaknesses. Although the company has diversified its commission-based revenues in recent years, we view the high revenue concentration by a limited number of insurance carriers as a weakness, despite Confie Seguros's ability to retain advanced commissions on more than 90% of policies written, and its current relationship with 50 carriers that maintain nonstandard auto insurance risk portfolios.

The rating also considers the success Confie Seguros has demonstrated in acquiring targeted competitor agencies and growing its enterprise by attaining scale and operating efficiencies. We believe historical EBITDA generation and prospective earnings from recent acquisition initiatives will allow the company to delever effectively its debt obligations from its internal free cash-flow generation (excluding future acquisitions).

We believe that Confie Seguros maintains a compelling competitive peer advantage. Although the company has an undiversified insurance offering--limiting itself to nonstandard personal auto policies--we view the niche expertise that the company has created in regards to the dynamics of its unique customer base as a clear positive for Confie Seguros. Its dominance in the personal lines subsector (fifth-largest independent personal lines agency) and its leading position in the number of store fronts (the primary distribution channel for nonstandard auto offerings) are also competitive advantages. Finally, we view the company's ability to extract higher commissions than competitors as a compelling strength to its business profile.

Outlook

The stable outlook reflects our view that Confie Seguros will continue its growth strategy and opportunistically implant store locations (via acquisitions or self-build agency stores) in strategic locations. We view the continued expansion in Texas and other underserved geographic locations in the U.S. as a significant competitive advantage for the company.

We expect Confie Seguros's fiscal 2012 total revenues to benefit from the incremental revenues from the 15 acquisitions in 2012, and to a lesser degree the additional acquisitions that it expects to close in the fourth quarter. We assume that the company will continue to report fiscal 2013 revenue growth of at least 15% compared to the 12 months ended July 31, 2012. This would reflect recurring nonstandard policy sales on the 2012 acquisitions, a conservative 2.5% increase in annual same-store policy sales on its existing store-fronts, higher brokerage fee revenues from targeted 2012 acquisitions and further implementation of discretionary services throughout the acquired agency portfolio, and the opening of a conservative number of new locations. Based on pending savings associated with the reorganization of back-office processes to Mexico, we expect adjusted EBITDA margins to remain more than 28% and free cash flow (excluding acquisitions) available for debt repayment to be 40% of EBITDA generation.

We expect Confie Seguros to delever within the first year of the new secured loan debt financing. This expectation is based on projected adjusted EBITDA generated in 2013, and to a lesser extent the projected mandatory debt repayments from the excess cash-flow sweep upon free cash-flow generation. We expect the company's pro-forma adjusted 2013 fixed-charge coverage ratio to be 1.8x, which includes the 15% noncash preferred unit dividends that accrue until the preferred units are redeemed and paid to the investor. We believe that future unplanned acquisitions will be financed with available cash at hand and supplemented with its revolving credit facility until the company generates consolidated accretive cash flow to reduce its revolver utilization.

We could lower the ratings during the next 12 months if the company does not meet our expectations, is not disciplined or successful in its acquisition strategy, or incurs additional debt that is not supported by prospective operating earnings. Conversely, if the company's operating performance significantly exceeds our expectations, resulting in lower leverage and higher financial flexibility, we would consider raising the rating within the next 12-24 months. This would be demonstrated by total adjusted leverage (including the perpetual preferred units) of 6.0x or less and adjusted EBITDA fixed-charge coverage of 2.0x or above.

Related Criteria And Research

-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

-- U.S. Insurance Broker Criteria, April 22, 2008

Ratings List

New Ratings

Confie Seguros Holding II Co.

Counterparty Credit Rating B-/Stable/--

$252 mil sr sec 1st-lien term loan B

$75 mil sr sec 1st-lien revolver

B-

Recovery rating 3

$110 mil sr sec 2nd-lien term loan CCC

Recovery rating 6

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