France-Based Insurance Broker Andromeda Investissements (APRIL) Assigned Preliminary 'B' Rating; Outlook Stable

  • Andromeda Investissements is a holding company incorporated by funds managed by private equity firm CVC to acquire up to 100% of APRIL S.A., a France-based provider of insurance wholesale brokerage services.
  • Andromeda Investissements plans to issue a €550 million term loan facility maturing in 2026 to fund the acquisition
  • We are assigning our preliminary 'B' ratings to Andromeda Investissements and its proposed senior secured debt. The preliminary recovery rating on the debt is '3', indicating our expectation of 60% recovery prospects in the event of a payment default.
  • The stable outlook reflects our view that APRIL will continue to see strong demand for its brokerage services over the next 12 months, supporting sound organic growth.
PARIS (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating action listed above.
The rating reflects our view of funds managed by private equity firm CVC's planned acquisition of APRIL S.A. and its management team through holding company Andromeda Investissements. Andromeda Investissements will initially acquire about 65% of APRIL's share capital, triggering a mandatory tender offer for the remaining about 35% held by minority interests, which we expect Andromeda Investissements will also obtain, making CVC the 100% owner. The offer price is €22 per share, with APRIL thus valued at about €900 million. To finance the acquisition, Andromeda Investissements plans to issue a senior secured term loan of up to €550 million (of which €358 million will be drawn to acquire about 65%, and up to €192 million will be additionally drawn to acquire the remaining minority shares), and CVC will contribute a further €385 million via equity, part of it as a shareholder loan, which we consider as equity-like. The transaction is subject to customary closing conditions and regulatory approval, and will likely be completed by July 2019. While we expect Andromeda will achieve 100% ownership of APRIL S.A., in the unlikely event that its final stake is lower--at 65%-95%--we would expect no material change to the adjusted leverage or the rating.
Our assessment of APRIL's business risk profile reflects the company's leading market position in France as a wholesale insurance broker for a number of niche segments, primarily in health insurance, credit protection, disability and death protection, and some property and casualty niche products. In our view, the group's market positions are supported by its well-recognized brand, and by its large broker network, with 12,000 active brokers.
In our view, APRIL benefits from its mix of end customers--small businesses, senior citizens, and self-employed workers, as well as the favorable underlying growth prospects of the group's key segments, health and credit protection. A general increase in healthcare spending, France's ageing population, and the increasing share of private health insurance over public health insurance due to political and regulatory decisions, benefit APRIL's health insurance products. Furthermore, credit protection insurance growth will likely be boosted by the "Bourquin" law, implemented in January 2018, which allows creditors to change their insurance policy on each anniversary date. This should support growth in individual delegated credit protection insurance, APRIL's target segment.
Furthermore, APRIL's good revenue visibility thanks to its medium-to-long-term contracts (five years duration for health insurance, on average, and eight years for credit protection), and its well-diversified broker base and end-clients base, are additional supports to the business risk profile, protecting the group from significant volatility in revenue and earnings, even in the case of client or distributor loss.
These strengths are, however, constrained by the group's relatively small size compared with large international insurance brokers such as Willis Towers Watson PLC (BBB/Stable/--) or Marsh & McLennan Cos. (A-/Negative/A-2); and its narrow business scope, with a focus on health and protection insurance products that represent close to 70% of its brokerage EBITDA. The insurance brokerage market is very fragmented and competitive, with limited barriers to entry. APRIL's relatively small size and niche focus could make the group vulnerable to increased competition, should large international peers decide to strengthen their presence in the French market.
In addition, we view APRIL's geographic concentration in France, where it generates about 85% of revenues, as another weakness. This concentration makes the group vulnerable to regulatory developments affecting the French healthcare system and credit protection insurance framework. Although recent regulatory developments have supported APRIL's business, it has not always been the case. For instance, the ANI law ("Accord National Interprofessionnel") affected APRIL's health insurance activities and profitability in 2016 by causing a decline in the individual health insurance market, APRIL's target segment at that time.
We assess APRIL's profitability differently from its peers due to the group's specific business model as a wholesale broker. APRIL's brokerage revenues include fixed commissions earned on premiums volume and variable commissions on insurers' profits. However, APRIL has to share these commissions with retail brokers who operate as distributors for APRIL's products. This business model offers more flexibility and more downside protection, in our view, than if APRIL had to bear the labor costs of a large sales force, or the fixed costs of a dense agency network. Although this model has not translated into stronger profitability compared with peers--APRIL has S&P Global Ratings-adjusted EBITDA margins of 13%-14%, compared with 20%-30% for Willis Tower Watson, Marsh & McLennan, and Hyperion Insurance Group Ltd.(B/Stable/--)--it has provided greater stability in EBITDA margins.
In addition to focusing on brokerage business, April has historically retained some insurance risk, but a significant portion of its insurance activities is reinsured. We view the insurance business as supporting APRIL's brokerage core business. APRIL mainly underwrites health and protection products and some property and casualty risks. APRIL benefits from structurally strong margins on these selected products. As such, in our view, the insurance risk-carrying activities will support stable cash flows generation in the near-term.
Our assessment of APRIL's financial risk profile incorporates our expectation that the contemplated transaction will result in adjusted debt to EBITDA of about 6.0x at year-end 2019. While we forecast deleveraging in the next two years, in the absence of discretionary spending or shareholder friendly actions, our assessment is also influenced by the company's financial sponsor (FS) ownership. As a result, we view the risk of re-leveraging of APRIL's capital structure as high. We note that CVC will provide equity, part of it in the form of a shareholder loan. We have excluded this financing from our financial analysis, including our leverage and coverage calculations, since we believe the common equity financing and the non-common-equity financing are sufficiently aligned. We believe the FS will not exercise any credit rights associated with the shareholder loan.
We anticipate improving EBITDA margins over the forecast period, supported by the growth in new profitable businesses, divestment of less profitable activities, and efficiency and IT improvements. We view positively the company's good EBITDA-to-operating cash flow conversion and its ability to generate free operating cash flow (FOCF), supported by the low expenditure requirements given APRIL's well invested platform. We forecast underlying annual FOCF generation of €30 million-€40 million in 2019-2020, which represents more than 5% of adjusted debt and provides good prospects for deleveraging.
Furthermore, the group's comfortable cash interest coverage ratios help sustain the group's high leverage, in our view.
The final ratings will depend on the successful completion of the proposed transaction--including Andromeda Investissements' acquisition of 65%-100% of APRIL's share capital--and our receipt and satisfactory review of all final transaction documentation. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If S&P Global Ratings does not receive final documentation within a reasonable time frame, or if final documentation departs from materials reviewed, we reserve the right to withdraw or revise our ratings. Potential changes include, but are not limited to, use of loan proceeds, maturity, size and conditions of the loans, financial and other covenants, security, and ranking.
The stable outlook reflects our view that APRIL will continue to see strong demand for its brokerage services over the next 12 months, supporting sound organic growth. It also incorporates our view that the company will maintain resilient EBITDA margins, resulting in adjusted debt to EBITDA of 5.5x-6.0x, while generating positive FOCF.
We could lower the ratings if APRIL experienced a material decline in profitability or higher volatility in margins, due to unexpected operational issue or adverse regulatory development, and if FOFC generation deteriorated and turned negative on a prolonged basis. Additionally, if funds from operations (FFO) cash interest coverage reduced to below 2.0x due to a weakening of operating performance, we would consider lowering the rating.
We could consider an upgrade if APRIL improved its S&P Global Rating-adjusted debt to EBITDA to less than 5.0x, in line with a higher financial risk profile assessment. A positive rating action would also depend on shareholders' commitment to demonstrate a prudent financial policy and maintain credit metrics at this level.
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