Following the XL Group acquisition announcement, FITCH places AXA entities on Rating Watch Negative
The rating actions follow yesterday's announcement that AXA plans to acquire XL Group Ltd (XL) for EUR 12.4 billion, which will be paid entirely in cash. AXA expects to finance the cash consideration via EUR 3.5 billion available cash resources, EUR 6 billion from the IPO of AXA's US operations (Life & Savings and Alliance Bernstein) planned in 2Q18, and related pre-IPO transactions and EUR 3 billion via issuance of subordinated debt. The target completion period is 2H18, subject to regulatory approvals and approval by XL shareholders.
KEY RATING DRIVERS
The RWN reflects Fitch's view that there are execution risks associated with the planned IPO of AXA's US life operations that could a have a negative impact on AXA's credit profile in relation to the planned acquisition of XL. If the IPO is not concluded successfully, AXA may, at least in part, draw on a EUR 9 billion credit line the group has lined up as a contingent funding facility to fund the acquisition of XL. This scenario would increase AXA's financial leverage and weaken the group's fixed-charge coverage beyond the tolerance of AXA's ratings. Had the transaction not been partly financed by the successful completion of the IPO, Fitch would have affirmed the IFS rating with a Stable Outlook.
Fitch believes that AXA's Prism FBM score will remain 'Very Strong' once the acquisition of XL is completed. However, Fitch expects AXA's financial leverage post transaction to increase by around 7pp to 30% based on a pro-forma calculation on FY17 financials, assuming the successful IPO of the group's existing US life operations. If the goodwill generated by the transaction is excluded, financial leverage would rise to around 32%. Fitch notes that AXA's management has committed to reduced debt gearing by the end of 2020, irrespective of the subsequent sell-downs of AXA US life, by the end of 2020.
Fitch believes the planned acquisition is positive for AXA's Property and Casualty (P&C) business profile and would carry low to moderate execution and integration risks, given the limited overlap in the businesses and our expectation that XL will continue to operate as an independent franchise. However, while XL is expected to contribute strong earnings to AXA, these are likely to be volatile given XL's business mix, as demonstrated by the net loss of USD 560 million reported by XL in 2017.
AXA's planned acquisition of XL is consistent with the group's strategy to expand into commercial P&C. However, the reduced presence in the US life business following the IPO reduces the diversification of the group's business mix and thereby offsets the benefit of the XL acquisition to some extent. Overall, Fitch views the planned acquisition of XL as broadly neutral for AXA's global business profile.
Fitch will resolve the RWN upon completion of the IPO of AXA's US life business. The IFS ratings are likely to be affirmed at 'AA-' if the IPO is completed successfully and the risk of AXA having to draw on the credit facility recedes, provided that the Prism FBM score remains 'Very Strong'.
The ratings could be downgraded if AXA's Prism FBM score falls to 'Strong' or financial leverage increases above 30% on a sustained basis, which could occur if the planned IPO of the US life business proves unsuccessful.