Fitch Ratings has assigned initial ratings to Harbinger Group Inc. (HRG) as follows:
--Long-Term Issuer Default Rating (IDR) at 'B';
--$500 million 10.625% senior secured notes at 'B/RR4'.
The Rating Outlook is Stable.
The ratings consider HRG's relatively high leverage, adequate debt service capabilities, and acquisition focused operating strategy. The company currently operates in two business segments: consumer products through its 53% ownership in Spectrum Brands, Inc. (SPB) and insurance though its wholly owned subsidiary Fidelity & Guaranty Life Holdings, Inc. (F&G Life). While Fitch believes that there is significant execution risk associated with the HRG's acquisition strategy, the diversification of the company's operating profile and cash flows could improve over time if HRG is successful with this strategy.
Fitch views HRG's pro-forma condensed combined leverage (Debt and Preferred Stock/adjusted EBITDA) as high at approximately 5.2 times (x) currently, which assumes approximately $450 million of EBITDA at SPB and $50 million of statutory dividends from F&G Life. Consolidated debt totaled $2.6 billion at July 3, 2011, including approximately $1.7 billion of SPB related debt and $0.3 billion of redeemable preferred stock. Fitch estimates HRG's current financial leverage ratio (Debt/Capital) at 65% on a consolidated basis, 49% at HRG only. It is also noted that HRG's notes are structurally subordinated to the claims on cash flows and assets from existing and future debt holders at SPB and F&G Life. Interest and debt amortization on the HRG notes will primarily be serviced by dividends from its subsidiaries and/or cash on hand.
Consolidated leverage is expected to trend down to the 4.5x to 5.0x range over the next 12 months based on management plans to further debt reduction at SPB. Fitch notes that HRG's ability to increase secured debt to fund future acquisitions is somewhat limited by financial covenants, which includes a minimum collateral coverage ratio at 2x at HRG only. It is noted that there is less restriction on the amount of unsecured and/or subordinated debt. However, given restricted payment basket limitations at the SPB level and regulatory conditions at F&G Life, Fitch does not expect there to be a material amount of unsecured or unsubordinated debt at the HRG level. Over the near term, Fitch expects acquisitions to be funded through approximately $616 million of existing cash and invested assets held by HRG.
HRG's debt service capabilities is somewhat constrained due to limits on cash flows from both SPB and F&G Life. Cash flow from SPB is limited by its term loan agreement, which specifies maximum annual dividend payouts of $40 million. Cash flow from F&G Life is primarily limited by statutory dividend restrictions, which is expected to limit dividends on a run-rate basis to approximately $50 million. Based largely on those restrictions, interest coverage is expected to be in the 1x to 2x range. Over the near term, HRG's liquidity position benefits from existing holding company cash and a financial covenant that requires HRG to maintain a minimum cash balance equal to six months of HRG's senior secured debt interest expense. Further, HRG's ability to pay dividends or other cash distributions to its shareholders is limited by financial covenants to no more than 50% of net income and subject to the aforementioned collateral coverage ratio.
The Stable Outlook reflects Fitch's view that improved operating trends at both SPB and F&G Life are sustainable over the near term. In the near term, Fitch believes that SPB is well positioned to gain share in a weak economy due to its value based operating strategy, which should improve the company's revenues and cash flows. Furthermore, Fitch believes that F&G Life's improved balance sheet fundamentals, expense reductions and investment portfolio repositioning should result in more stable earnings performance and dividend capacity going forward.
Key rating triggers that could lead to a downgrade include a reduction in F&G Life's ordinary statutory dividend capacity to below $40 million, a change in SPB's strategy to reduce leverage to 3x, an increase in consolidated leverage to the 6x range, an increase in HRG (parent only) financial leverage ratio to above 60%, and the deployment of existing cash balances that increases the enterprise's credit risk.
Key rating triggers that could lead to an upgrade include an increase in F&G Life's ordinary statutory dividend capacity to over $60 million, a reduction in consolidated leverage to the 4x range, a reduction in HRG (parent only) financial leverage ratio below 40%, and the deployment of existing cash balances that improves the magnitude and diversity of cash flows to HRG.
HRG is a NYSE-traded holding company that is majority owned by investment funds affiliated with Harbinger Capital Partners LLC (Harbinger). Harbinger established HRG as a permanent capital vehicle to obtain controlling equity interests in established, dividend paying businesses that operate across a diversified set of industries.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September 22, 2011);
--'Corporate Rating Methodology' (August 12, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Bruce E. Cox, +1-312-606-2316
Director
Fitch,
Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary
Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing
Director
or
Secondary Analyst
Grace Barnett,
+1-212-908-0718
Director
or
Committee Chairperson
Julie
A. Burke, CPA, CFA, +1-312-368-3158
Managing Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com
