Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and issue-level ratings for
Fitch has also affirmed issue-level ratings for senior unsecured notes issued by its subsidiaries,
The Rating Outlook remains Positive to reflect improved organic trends, some operating profitability improvement in 3Q23 and EBITDA leverage that could position the rating higher over time. However, Fitch would look for evidence of sustained improvements in EBITDA margins and FCF in the coming years to position the issuer for a higher rating.
The IDR and security ratings impact approximately
WTW's ratings reflect the company's position as one of the global leaders in the insurance brokerage and HR consulting industries, stable financial leverage, good financial flexibility with a strong cash generation profile, and historically stable profits and margins.
Key Rating Drivers
Organic Trends: WTW's organic growth remains positive despite execution challenges in recent years, with organic revenue having accelerated to the 7%-9% range YTD 2023 from low/mid-single digit in 2022. Management appears to have moved past client retention issues witnessed in 2021 following its terminated merger with
Margins Lower than Peers: Fitch would look for more evidence of sustained margin improvement from the company, given its 2023 downward revision of its margins and medium-term FCF guide. WTW historically had lower EBITDA and FCF margins than some of its larger peers and lowered its medium-term FCF guide earlier this year. Its EBITDA is in the mid-20% range, or below certain peers that generate high-20% to mid-30%.
FCF margins were in the low- to high-single digit percentage range over much of the past cycle (higher in 2021 due to a one-time merger termination payment that benefited cash flow) versus some peers that operate more regularly in excess of 10%. Management has implemented cost reduction initiatives to improve its profitability and is targeting
Strong Market Position: Fitch views WTW's market position as a global leader in many of its end markets as a credit positive. The company has diverse operations in HR and employee benefits consulting, insurance brokerage and benefits administration. WTW is one of the four largest insurance brokers globally, which provides it a unique value proposition for its large, multi-national clients. Its strong market share enables the company to compete for business on a global basis and helps its customers navigate global employee and insurance-related issues.
Stable Business Model: WTW operates a fairly predictable business in an industry that performs well throughout the economic cycle. Parts of its business include project-based and consulting work that is more cyclical, but this is balanced against more stable insurance operations. WTW grew revenue organically each year since 2007, including through the 2008 recession (exceeding certain of its large peers that reported low single-digit declines at the time) and during the pandemic. Revenue and earnings are well diversified by customers, although there is some geographic concentration, with the
Financial Flexibility: Fitch views WTW's financial flexibility favorably, although notes its FCF generation has been more volatile than certain of its peers. The company generated
WTW's disciplined capital management strategy provides ample ability to access the capital markets, reinvest in the business and capitalize on growth opportunities. WTW also has a large unrestricted cash balance of
Stable Financial Leverage: WTW's EBITDA leverage is relatively low for the rating category and expects management could continue to operate in the low- to mid-2.0x range in the next few years, although share repurchases and M&A could be factors that increase leverage beyond the upper-end of this range. EBITDA leverage was relatively stable historically and in the 2.0x-3.0x range for much of the past cycle since 2009 (low-2.0x as of
Derivation Summary
WTW's ratings reflect the company's strong competitive position as one of the global leaders in insurance brokerage and HR and employee benefits consulting, moderate financial leverage, good financial flexibility with a strong cashflow generation profile, and historically strong profits and margins. WTW is smaller and moderately less diversified than higher-rated industry peers
WTW is among the four largest North American insurance brokers. It operates with lower EBITDA and FCF margins versus its larger peers, which is a point of differentiation with respect to Fitch's IDR. EBITDA leverage in recent years in the 2.0x to 3.0x range (low-2.0x currently) is relatively close to peers and manageable for the rating category. It has underperformed peers, however, both in organic revenue trends and profitability (margins). Fitch believes the company's strong share position, solid margins and cash flows, and moderate leverage position the rating well at the 'BBB' rating category relative to Fitch-rated peers in the insurance brokerage and business services industries.
Key Assumptions
Organic growth remains in the mid-single digit percentage range in the next few years;
EBITDA margins expand toward the high-20% range through 2026, driven by operating leverage on higher revenue and cost savings initiatives;
Capex remains near 3% of revenue over the ratings horizon;
Capital allocation priorities remain skewed toward shareholder returns via a combination of dividends and share repurchases in the coming years. Fitch does not forecast incremental M&A, although the company has acknowledged it is opened to inorganic growth.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Material and sustained improvements to operating fundamentals, including revenue growth or EBITDA/FCF margins;
EBITDA margins sustained in the high-20% or higher range and/or FCF margins sustained at 10% or higher;
EBITDA leverage, defined as debt/EBITDA, sustained below 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 3.0x for a sustained period with a credible de-leveraging plan;
A material change in strategy and/or deterioration of financial profile or operating performance.
Liquidity and Debt Structure
Strong Liquidity: WTW is well positioned from a liquidity perspective, with a sizeable cash balance, historically strong cash flow generation and access to cash on its revolver. The company had approximately
Debt Profile: WTW's financial flexibility is supported by strong banking relationships, committed bank lines, and access to a range of debt and equity markets in the
Issuer Profile
WTW is one of the world's largest insurance brokerage and HR consulting firms, with 2022 revenue and EBITDA of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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