Fitch Revises Hastings' Outlook to Positive; Affirms IDR at 'B '
The Outlook revision follows the successful completion of Hastings' IPO. Despite the deleveraging, in Fitch's view, Hastings' financial metrics on a cashflow basis keep the IDR at the 'B+' level. Additional cash flow generation leading to further deleveraging supported by a business with greater scale and diversification would support a higher rating. The Outlook revision to Positive indicates that Fitch believes the upgrade triggers could be met within a 12-24 month horizon.
KEY RATING DRIVERS
Successful Completion of IPO
The execution of a successful IPO is a positive development for the group's credit profile, as the company plans to use the proceeds to reduce leverage on its balance sheet. Hastings raised approximately GBP180m in gross proceeds. The proceeds will be used to redeem a portion of the outstanding GBP266.5m senior secured fixed-rate notes due 2020. The company expects to use new bank facilities to redeem the remainder of the notes later in the year. Hastings reported net debt of GBP364.6m at end-1H15.
Agile Business Model
Hastings has maintained favourable underwriting performance in the face of a competitive motor insurance market, while broker fee income generation remains strong. Fitch believes that the insurer's agile business model, low expense base and use of extensive driver profile data provide it with a competitive advantage over larger, more established players. However, there is the risk of a competitor replicating this model within three to five years, which could put Hastings' current growth trajectory at risk.
Positive: Future developments that could lead to positive rating action include:
- Funds from operations (FFO) gross leverage below 3.5x (end-2014: 4.5x) on a sustained basis.
- FFO interest cover above 4.0x (end-2014: 2.6x) on a sustained basis.
- Sustained increase in operating EBIT margin to 26%, indicating an improved competitive position across divisions.
Negative: Future developments that could lead to negative rating action include:
- FFO gross leverage above 5.0x on a sustained basis.
- FFO interest cover below 2.5x on a sustained basis.
- Significant underperformance of Hastings Insurance Services Limited, Hastings' broker arm or Advantage Insurance Company Limited (AICL), the group's underwriter, or adverse reserve developments in AICL resulting in margin pressure.