The previous Rating Watch had reflected the pending acquisition of Willis Towers Watson plc (BBB). While the deal remains pending and there remains some uncertainty around pro forma financial policy, Fitch believes Aon is strongly positioned at the 'BBB+' rating category with or without the deal closure. Further, Aon once again proved its strong performance through the cycle with organic revenue growth during 2020 despite the negative economic impacts from the coronavirus pandemic.
The IDR and security ratings impact approximately USD 7.8 billion of debt outstanding as of December 2020, not including unused capacity under the company's USD 1.65 billion multi-currency, senior unsecured revolving credit facilities.
KEY RATING DRIVERS
Pending Willis Towers Combination: Aon plc entered into a definitive agreement to acquire WLTW in March 2020 in an all-stock USD 35 billion EV transaction (Fitch-calculated, at time of announcement). Fitch believes the deal combines two highly complementary businesses among the major providers of global risk management services and creates significant scale, with combined revenue of USD 20.4 billion and pre-dividend FCF of USD 4.1 billion in 2020. Fitch views the company as strongly positioned in the 'BBB+' rating category, although we will look for more clarity surrounding pro forma financial structure and the capital plan upon the deal closing. Fitch believes the significant deal size brings with it material execution risk. There also remains uncertainty surrounding the regulatory outcome of approval of the transaction.
Strong Market Position: Fitch views Aon's market position as a credit positive, with the company acting as one of the global leaders in many of its end markets. The company has diverse operations in HR and employee benefits consulting, insurance/reinsurance brokerage and benefits administration. Aon is often cited as the second largest insurance broker globally and, via its pending combination with WLTW, could become the world's largest insurance brokerage firm. Its strong market share enables the company to compete for business on a global basis and help its multi-national clients navigate employee and insurance-related issues that transgress beyond national borders.
Stable Business Model: Fitch believes the company operates a fairly predictable business model in an industry that performs well throughout the economic cycle. Parts of its business include project-based and consulting work that was more cyclical historically, but this is balanced against the more stable insurance operations. Aon grew revenue organically each year since 2007, except for a modest decline during 2009, and also grew during the 2020 coronavirus pandemic. Revenue and earnings are well diversified by customers although there is some geographic concentration, with the U.S. and U.K. comprising 45% and 14% of 2020 revenue, respectively. The company is also meaningfully diversified by services offered.
Strong Financial Flexibility: Fitch views the company's financial flexibility as a credit positive with respect to the IDR. Aon's disciplined capital management strategy provides ample ability to access the capital markets, reinvest in the business and capitalize on growth opportunities. This flexibility remains even if the pending WLTW acquisition were to be cancelled and/or restructured. The company generated more than USD 1.0 billion of post dividend FCF each year since 2013, except for 2017 which was negatively impacted by unique one-time payments related to divestitures. The company also has a high cash balance and access to additional liquidity via multiple revolving credit facilities and both USD and EUR CP programs.
Stable Financial Leverage: Fitch views the company's gross leverage as reasonable for the rating category, with leverage not expected to change materially upon completion of the WLTW deal given the all-stock consideration. Fitch estimates pro forma leverage at closing could be in the low/mid-2.0x range, or modestly higher than 2.2x at YE 2020. Gross leverage was relatively stable historically and near 2.0x for the past five years (sub-2.0x for much of the earlier part of the current cycle, or 2007-2014). Fitch expects management is committed to a strong investment grade rating and could remain near 2.0x over the ratings horizon even as a stand-alone entity, although M&A could be a factor leading to higher leverage over time with or without WLTW.
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