May 25, 2017 / 1:45 PM / 2 months ago

Fitch Revises Rating Watch on HRG Group to Evolving from Negative

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(The following statement was released by the rating agency) NEW YORK, May 25 (Fitch) Fitch Ratings has revised the Rating Watch on HRG Group, Inc.'s (HRG) 'B' Long-Term Issuer Default Rating (IDR) to Evolving from Negative. Fitch has also revised the Rating Watch on HRG's senior secured notes, rated 'BB-/RR2', and its senior unsecured notes, rated 'B/RR4', to Evolving from Negative. KEY RATING DRIVERS - IDRs and Senior Debt The revision to Evolving from Negative follows the announcement that a consortium led by CF Corp. will acquire Fidelity & Guaranty Life (FGL; Long-Term IDR 'BB'/Evolving), a company that is 80.4% owned by HRG, for a total of approximately $1.8 billion, plus the assumption of $405 million of existing debt. The consortium includes the founders of CF Corp., funds affiliated with The Blackstone Group, L.P. (Long-Term IDR 'A+'/Stable) and Fidelity National Financial, Inc. (Long-Term IDR 'BBB-'/Positive). Yesterday, HRG also announced the sale of Front Street Re (Delaware) Ltd. (Front Street), which is wholly-owned by HRG, to CF Corp. for $65 million. The Evolving Watch reflects that HRG's ratings may move upward, downward or stay the same, depending on the outcome of HRG's exploration of strategic alternatives to maximize shareholder value following the closing of the FGL and Front Street transactions. Fitch believes that the CF Corp. consortium's ability to obtain regulatory approvals for the FGL and Front Street transactions is strong, since CF Corp. is a public U.S. company. Anbang Insurance Group Co., Ltd., the Chinese entity that previously entered into a merger agreement with FGL, terminated the agreement in April 2017 in part because of its inability to obtain necessary regulatory approvals. The 'B' Long-Term IDR is supported by the credit risk profile and underlying diversity of HRG's largest investment, Spectrum Brands, Inc. (Spectrum Brands; Long-term IDR of 'BB'/Stable), and HRG's adequate liquidity position, which is expected to further improve following the FGL sale. The rating is constrained by the concentrated nature of HRG's remaining investments. Following the FGL sale, HRG would effectively operate as a single-investment, pass-through structure for Spectrum Brands, which is 58.4% owned by HRG. The FGL and Front Street transactions continue the disposition of HRG's portfolio. In 2016, the company sold its wholly owned position in oil and gas company Compass Production GP, LLC, sold its interests in the asset management company CorAmerica, LLC and wound down the operations of Energy & Infrastructure Capital, LLC. HRG's remaining asset management business interest is in the asset-based lender Salus Capital Partners, LLC, which is in run-off. Fitch calculates that upstream dividends from HRG's subsidiaries relative to holding company interest expenses measured 0.5x in the first half of fiscal 2017 and fiscal years 2016 and 2015, down from 1.3x in fiscal 2014. Following the FGL and Front Street transactions, which would result in cash proceeds of approximately $1.5 billion to HRG, HRG would have sufficient resources to repay all of its $864.4 million 7.875% senior secured notes due 2019 and a portion of its $890 million 7.75% senior unsecured notes and other obligations, thereby improving the dividend coverage ratio to comfortably above 1.0x. Should the FGL and Front Street transactions not close as contemplated, there would be negative rating implications for HRG. The company is expected to have sufficient resources to fund its interest payments of approximately $137 million annually, given $139.5 million of readily available cash as of March 31, 2017 and cash proceeds from the FGL and Front Street transactions. Debt-to-equity based on the carrying value of HRG's investments was elevated at 3.0x as of March 31, 2017, compared to 2.7x at FYE 2016 and 3.0x at FYE 2015. Since HRG's two largest current holdings are publicly traded companies (Spectrum Brands and FGL), Fitch also considers pro forma debt-to-equity on the basis of the market value of HRG's public investments, but recognizing that market values can fluctuate. Nevertheless, on this basis, Fitch calculates that HRG's leverage was 0.4x as of March 31, 2017, compared to 0.4x at FYE 2016 and 0.6x at FYE 2015. Debt-to-equity based on the carrying value of HRG's investments is expected to decline to 0.5x and debt-to-equity on the basis of the market value of HRG's public investments is expected to decline to 0.1x pro forma for the FGL sale. HRG's 'BB-/RR2' senior secured debt rating reflects an expectation of superior recoveries for these securities in the event of a corporate default. Given the superior recovery prospects for the senior secured notes, the ratings are notched up twice from HRG's IDR. HRG's 'B/RR4' senior unsecured debt rating reflects an expectation of average recoveries for these securities in the event of a corporate default. Given the average recovery prospects for the senior unsecured notes, the ratings are equalized with HRG's IDR. According to HRG's secured and unsecured notes indentures, if a change of control occurs, the noteholders may require HRG to repurchase all or a portion of its notes for cash at a price equal to 101% of aggregate principal amount, plus any accrued and unpaid interest to the date of repurchase. RATING SENSITIVITIES - IDR and Senior Debt Resolution of the Evolving Watch will depend upon resolution of strategic alternatives explored by HRG. Fitch believes there is a greater chance of an upgrade than downgrade of HRG's ratings over the next six months, given that the FGL and Front Street transactions will result in reduced leverage and improved dividend coverage. The following factors may result in upward rating momentum in HRG's IDR: --A sale to a higher-rated entity; --Improvement in parent company interest coverage to or approaching 2.5x on a sustained basis, parent company leverage (carrying-value basis) maintained below 1.0x, and greater clarity with respect to HRG's long-term strategic direction, organizational structure, and ownership framework. The following drivers could result in a downgrade of HRG's IDR: --A delay in the CF Corp. consortium obtaining necessary regulatory approvals and/or closing the FGL and Front Street transaction, which would prolong HRG's ability to pay down debt; --A sale to a lower-rated entity; --Sustained uncertainty with respect to HRG's strategic direction, organizational structure, or ownership framework; --Deterioration in the operating performance of Spectrum Brands that results in a material decline in its value, dividend capacity and/or credit ratings. Under a scenario where HRG sells its remaining investments, retires outstanding debt, and effectively winds down or is sold to another entity and retires outstanding debt, Fitch would expect to withdraw HRG's IDR and classify outstanding debt ratings as paid in full. The senior secured debt rating of 'BB-/RR2' would be sensitive to any changes in the company's IDR, as well as to changes in the level of available asset coverage. The senior unsecured debt rating of 'B/RR4' is sensitive to potential changes in the company's IDR, as well as to changes in the level of available asset coverage. Fitch has revised the Rating Watch on the following ratings to Evolving from Negative: HRG Group, Inc. --Long-Term IDR 'B'; --Senior secured notes 'BB-/RR2'; --Senior unsecured notes 'B/RR4'. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Dodge Associate Director +1-212-908-0379 Committee Chairperson Justin Fuller, CFA Senior Director +1-312-368-2057 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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