Fitch Affirms Loews Corporation's IDR at 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Loews Corporation's (Loews; NYSE: L) long-term Issuer Default Rating (IDR) and senior unsecured notes at 'A'. The Rating Outlook is Stable.
Approximately $1.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Loews' ratings reflect the holding company's track record of being a good steward of capital, robust coverage and leverage metrics, strong financial flexibility, and cash and investments position. These considerations are offset by a nearly complete reliance on a single subsidiary for ongoing dividend flows with limited near-term prospects for diversification improvements, and possibility that Loews' other subsidiaries may require material capital support from the parent for reinvestment and growth opportunities.
HEIGHTENED DIVIDEND CONCENTRATION, EXPOSURE TO INSURANCE RISKS
Loews has historically benefited from a fairly well-diversified stream of dividends with some shorter-term variation given the underlying economic condition of each subsidiary's business. The subsidiaries include CNA Financial Corporation (NYSE: CNA; Fitch rated 'BBB+' IDR/'A' Insurer Financial Strength (IFS) with a Stable Outlook), Diamond Offshore Drilling, Inc. (NYSE: DO), and Boardwalk Pipeline Partners, LP (NYSE: BWP; 'BBB-' IDR; Stable Outlook), as well as Loews Hotels. Historically the energy subsidiaries have been considerable dividend contributors. However, given the sharp cyclical trough being experienced in energy, dividend flows to Loews have relied on, and, at least for the next few years, will continue to be highly reliant on CNA, which is expected to provide over 90% of total 2016 dividend income.
CNA's standalone ratings reflect its strong capitalization, stable earnings, and adequate reserve quality. Loews has demonstrated its support of CNA over the years through various actions that have improved CNA's capitalization. CNA's ratings also reflect anticipated challenges in a competitive property/casualty market rate environment, and the potential for adverse reserve development and deterioration in runoff operations including long-term care (LTC). Fitch assumes that the dividends paid to Loews in 2015 and 2016 will be sustained over the next few years. Fitch believes that if this policy remained and dividend payments continued as forecast, it will not have a material negative effect on CNA's capital levels and IFS ratings over the medium term.
Diamond Offshore Drilling Inc. (NYSE: DO), during the first quarter of 2016 (1Q16), decided to discontinue its dividend, as the oil price weakness continued to compound the effects of the oversupply in offshore rigs. The dividend decision is expected to incrementally improve near-term liquidity to meet Diamond's capital requirements (e.g. 2016 newbuild payments) and maintain financial flexibility. Fitch forecasts that Diamond will not pay any dividends over the medium term.
Boardwalk Pipeline Partners, LP (NYSE: BWP; 'BBB-' IDR; Stable Outlook), in February 2014, reduced its dividends by 81% (Loews' share dropped to $52 million in 2014 and 2015 from $297 million in 2013) mainly due to U.S. shale natural gas supply-demand shifts that have impaired pipeline economics for two of its significant assets, challenging contract renewals. This also enabled the company to use cash flow to fund capital spending and resulted in no need to access capital markets for project funding. While Boardwalk is pursuing projects to improve competitiveness and diversify its offerings, capital spending over the next three to four years will continue to limit dividend payments. Fitch projects that dividends will remain flat over the next few years.
Loews Hotels continues to demonstrate measured growth and favorable financial results. The wholly-owned hotel subsidiary has not and is not forecast to provide any distributions to Loews medium term.
ROBUST INTEREST COVERAGE, LEVERAGE METRICS
Dividend and investment income, net of corporate-level expenses, provide robust coverage of interest costs and fixed charges of Loews' outstanding parent-level corporate obligations. Coverage was 10.7x and 10.0x for the years ended Dec. 31, 2014 and 2015, respectively. Fitch's forecast base case coverage remains strong for the rating category at 10.6x for 2016.
Leverage metrics are strong on a cash flow and loan-to-value (LTV) basis. Cash-flow-based leverage was approximately 2.2x and 2.3x for the years ended Dec. 31, 2014 and 2015, respectively. Fitch's base case forecast leverage is expected to remain strong at 2.4x in 2016. Fitch-calculated LTV, as of April 1, 2016, is estimated to be nearly 11% considering all Loews assets and about 16% considering only the value of Loews' publicly traded subsidiary ownership positions.
Fitch's key assumptions within the rating case for Loews include:
--CNA dividends that remain flat year-over-year in 2016 following the $2 per share special dividend. Fitch assumes that CNA dividends remain level, which it does not expect will result in material pressure on capital levels and Fitch IFS ratings medium-term;
--Diamond dividends remain discontinued due to the challenged offshore drilling operating environment;
--Boardwalk dividends remain flat at approximately $52 million;
--Operating costs relatively consistent with historical levels;
--Subsidiary capital investments at average historical levels;
--Loews equity activity remains balanced with management's long-term value-creation objective resulting in cash and investment balances maintained near current levels to moderate the effects of, and act opportunistically, during market downcycles.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Improvements in the underlying credit quality of investees and subsidiary dividend flow diversification;
--Maintenance of a conservative financial and investment policy that retains robust interest coverage and leverage metrics, as well as liquidity.
Future positive rating actions are unlikely without a material improvement in underlying credit quality and dividend diversification.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Change in Loews' financial policy of maintaining a strong cash & investments balance relative to debt;
--Continued reliance on CNA for the majority of dividend flows with limited visibility for improvements in Diamond and Boardwalk's dividend contributions;
--Weakening underlying credit quality of investees that could, among other things, require considerable Loews support resulting in reduced liquidity;
--Mid-cycle interest coverage below 6.0x and/or cash flow-based leverage metrics exceeding 2.5x for a sustained period;
--Holding company-level acquisitions and/or shareholder-friendly actions inconsistent with the expected cash flow and leverage profile.
Future additional negative rating actions will be closely linked to Loews' ability to improve underlying credit quality and dividend diversification and reinvest in its subsidiaries, if necessary, with the maintenance of strong coverage and leverage metrics and liquidity position.
STRONG FINANCIAL FLEXIBILITY, CASH & INVESTMENTS POSITION
The holding company structure, with Loews' largest investments held in multiple majority-owned, publicly-listed companies, enhances its financial flexibility. This structure also protects Loews from having any recourse indebtedness of its investees. Additionally, there are no cross-default provisions between subsidiaries or between the parent and subsidiaries.
Loews does not have any debt maturities until 2023. The holding company is not subject to any material financial covenants.
Loews had pro forma cash and investments of approximately $4.8 billion, as of Dec. 31, 2015, including 1Q16 CNA regular and special and BWP regular dividend payments. Investment holdings are mainly comprised of cash equivalents and U.S. government bonds. Management indicated that it has held and will continue to hold significant amounts of cash & investments to moderate the effects of, and act opportunistically during, market downcycles.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Loews' ratings as follows:
--Long-term IDR at 'A';
--Senior unsecured notes at 'A'.
Fitch also rates the company's $500 million 3.75% senior unsecured notes due April 2026 'A'.
The Rating Outlook is Stable.