Oct 19 - Fitch Ratings has affirmed the 'B' Issuer Default Rating (IDR) and
'B/RR4' debt ratings of Harbinger Group Inc. (HRG), with a Stable
The ratings consider HRG's relatively high leverage, adequate debt service
capabilities, and acquisition-focused operating strategy. The company has two
major business segments: consumer products through its 57.5% ownership in
Spectrum Brands, Inc. (SPB; Fitch IDR of 'BB-'), and insurance through its
wholly owned subsidiary Fidelity & Guaranty Life Holdings, Inc. (F&G Life; Fitch
Insurer Financial Strength rating of 'BBB'). While Fitch recognizes there is
significant execution risk associated with HRG's acquisition strategy, the
diversification of the company's operating profile and cash flows could improve
over time if HRG is successful with this strategy.
Fitch views HRG's leverage as high. Consolidated leverage (consolidated debt and
preferred stock/adjusted EBITDA) was approximately 5.2x based on $477 million of
EBITDA (for the latest 12 months ) at SPB and $40 million of statutory
dividends from F&G Life. HRG's financial leverage ratio, excluding SPB-related
debt, was 61% at July 1, 2012. Outstanding debt and preferred stock totaled $2.7
billion at July 1, 2012, with approximately $1.8 billion of SPB and $900 million
at HRG. HRG's debt and preferred stock are structurally subordinated to the
claims on cash flows and assets from existing and future debtholders at SPB and
HRG's debt service capabilities are somewhat constrained due to limits on cash
flows from both SPB and F&G Life. Cash flow from SPB is limited by its term loan
agreement, and those conditions have loosened over the past year, allowing
greater cash flow to HRG from SPB. Cash flow from F&G Life is primarily limited
by statutory dividend restrictions and business needs, which is expected to
limit dividends on a run-rate basis to approximately $40 million.
Based largely on those restrictions, interest coverage is expected to be in the
1x to 2x range. Over the near term, HRG's liquidity position benefits from
existing holding company cash and a financial covenant that requires HRG to
maintain minimum cash balances equal to six months of HRG's senior secured debt
interest expense. Further, HRG's ability to pay dividends or other cash
distributions to its shareholders is limited by financial covenants to no more
than 50% of net income and is subject to collateral coverage ratio tests.
HRG's consolidated leverage will increase to about 5.7x on a pro forma basis
given the effect of SPB's recently announced acquisition of Stanley's Black &
Decker Hardware and Home Improvement Group. Consolidated leverage is expected to
trend down to the 4.5x range over the next 24 months based on management plans
for further debt reduction at SPB.
Fitch notes that HRG's ability to increase secured debt to fund future
acquisitions is somewhat limited by financial covenants, which includes a
minimum collateral coverage ratio of 2x at HRG only. Over the near term, Fitch
expects acquisitions by HRG to be funded through a combination of debt and
approximately $404 million of existing cash and invested assets held by HRG.
HRG uses the value of its controlled assets as collateral and its debt capacity
is limited by certain coverage metrics. The largest part of the collateral is
the value of SPB's shares. As SPB's performance improved consistently over the
past year its share price has increased commensurately. SPB's share price has
almost doubled in one year and HRG's collateral cushion is quite comfortable.
HRG could materially increase its debt under the liquid collateral coverage
ratio, which is its tightest covenant.
The Stable Outlook reflects Fitch's view that improved operating trends at both
SPB and F&G Life are sustainable over the near term. Fitch believes that SPB is
well positioned to gain share in a weak economy due to its value-based operating
strategy, which should improve the company's revenues and cash flows.
Furthermore, Fitch believes that F&G Life's improved balance sheet fundamentals,
expense reductions and investment portfolio repositioning should result in more
stable earnings performance and dividend capacity going forward.
HRG's primary strategy to acquire and grow attractive businesses that generate
sustainable free cash flow is likely to keep leverage high. Leverage could also
be erratic whenever there is a sizeable acquisition until the overall enterprise
attains a much larger scale. Debt and debt service payments are likely to dampen
near-term profitability. As a result, the rating is likely to remain in this
range in the intermediate term.
Key rating triggers that could lead to a downgrade include a reduction in F&G
Life's ordinary statutory dividend capacity to below $40 million, a change in
SPB's strategy to reduce leverage to between 2.5x to 3.5x within 18 to 24
months, an increase in consolidated leverage to the 6x range, an increase in
HRG's (parent only) financial leverage ratio to above 70%, and the deployment of
existing cash balances that increases the enterprise's credit risk.
Key rating triggers that could lead to an upgrade include a significant increase
in F&G Life's ordinary statutory dividend capacity from its current level of
approximately $80 million, a reduction in consolidated leverage to the 4x range,
a reduction in HRG (parent only) financial leverage ratio below 40%, and the
deployment of existing cash balances that improves the magnitude and diversity
of cash flows to HRG.
HRG is a NYSE-traded holding company that is majority owned by investment funds
affiliated with Harbinger Capital Partners LLC (Harbinger). Harbinger
established HRG as a permanent capital vehicle to obtain controlling equity
interests in established, dividend-paying businesses that operate across a
diversified set of industries. The company currently operates in three business
segments: consumer products through its 57.5% ownership in SPB, insurance
through its wholly owned subsidiary F&G Life, and Salus, a newly established
asset based lending business.
The following ratings are affirmed, with a Stable Outlook:
--Long-Term IDR at 'B';
--$500 million 10.625% senior secured notes at 'B/RR4'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research
--Insurance Rating Methodology (Oct. 18, 2012);
--Corporate Rating Methodology (Aug. 8, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
Corporate Rating Methodology