Fitch Expects to Rate HRG's $100MM Secured Issuance 'BB-/RR2'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to assign a rating of 'BB-/RR2' to HRG Group, Inc.'s (HRG) proposed $100 million senior secured note issuance. The notes are expected to have the same terms as the company's existing secured debt.

The proposed debt issuance would not affect HRG's existing long-term Issuer Default Rating (IDR) of 'B', existing senior secured debt rating of 'BB-/RR2', existing senior unsecured debt rating of 'B/RR4' or its Rating Outlook. HRG plans to use the proceeds from the proposed issuance for general corporate purposes, including financing future acquisitions by HRG or its subsidiaries.

KEY RATING DRIVERS

The expected rating reflects the limited impact of the proposed issuance on HRG's leverage (defined as debt-to-equity), unsecured funding profile as a percent of total funding, and recovery prospects for secured and unsecured debt classes. The equalization of the expected secured debt rating with that of HRG's existing secured debt reflects the fact that the notes are expected to rank pari passu with existing secured debt in terms of payment priority.

Pro forma for the secured debt issuance, Fitch estimates that debt-to-equity would increase to 0.60x from 0.56x based on YE2014 financial data, while the proportion of secured debt-to-total debt would increase to approximately 48% from 45% as of the same date. While the direction of these changes is viewed negatively, their magnitude is viewed as modest, particularly relative to HRG's ratings.

Fitch revised HRG's Outlook to Positive from Stable in June 2014, following the completion of several transactions which improved the company's credit profile, in Fitch's view. That said, HRG's coverage of holding company interest expenses and near-term maturities relative to upstream dividends from portfolio companies has more recently declined, and the additional interest expense associated with the proposed debt would further pressure coverage. Specifically, interest coverage declined to 0.85x for the LTM ended Dec. 31, 2014, and pro forma for the secured debt issuance, coverage would fall further to 0.79x.

Fitch has previously articulated that a sustained reduction in interest coverage below 1x could lead to negative rating action including removal of the current Positive Outlook and/or a rating downgrade. Fitch expects to continue to monitor HRG's interest coverage as well as dividend capacity at the portfolio company level.

RATING SENSITIVITIES

The expected senior secured debt rating of 'BB-/RR2' would be sensitive to changes in the HRG's IDR. Furthermore, the expected secured debt rating would be sensitive to changes in the level of available asset coverage.

In resolving the Positive Outlook, Fitch will primarily focus on the company's ability to maintain or improve its current financial metrics while deploying existing cash balances in a measured manner which does not adversely impact its risk profile or materially alter its operating strategy.

The following developments could result in potential long-term upward rating momentum in HRG's IDR:

--Prudent deployment of balance sheet cash and further diversification of investments;

--Improvement in parent-company interest coverage to over 1.5x on a sustained basis;

--Leverage (debt-to-equity) at the parent level maintained at or below current levels.

The following drivers could result in downward pressure on HRG's IDR and/or revision of the Positive Outlook:

--Increase in risk appetite in the company's future cash deployment;

--Significant increase in parent company leverage;

--A sustained reduction in interest coverage below 1x;

--Deterioration in operating performance at any of HRG's significant subsidiaries which results in a material decline in their value, dividend capacity and/or credit ratings.

HRG is a publicly traded investment holding company with consolidated assets of $31.2 billion at Dec. 31, 2014. HRG was established 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 four business segments: consumer products through its 59% ownership in Spectrum Brands; insurance through Front Street Re, and its 80% ownership in Fidelity & Guaranty Life (FGL); energy through an oil & gas MLP, Compass Production Partners of which it owns 99.8%; and asset management thorough several majority and minority-interest owned firms.

Fitch expects to assign the following ratings:

--Proposed $100 million senior secured notes, due January 2019 'BB-/RR2'.

Fitch currently rates HRG as follows:

--Long-term IDR 'B', Outlook Positive;

--Senior unsecured notes 'B/RR4';

--Senior secured notes 'BB-/RR2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Fitch Revises HRG Group's Outlook to Positive on Recent Capital Actions' (June 6, 2014).

--'Global Non-Bank Financial Institutions Rating Criteria' (March 20, 2015).

Applicable Criteria and Related Research:

Global Non-Bank Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863584

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Fitch Ratings
Primary Analyst
Brendan Sheehy, +1-212-908-0138
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tyra Junaid, +1-212-908-0291
Director
or
Committee Chairperson
Nathan Flanders, +1-212-908-0827
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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