Old Mutual’s Sale of Skandia Insurance Company Leads to Beneficial Debt Reduction

Old Mutual’s Sale of Skandia Insurance Company Leads to Beneficial Debt Reduction

On 3 February, Old Mutual Plc (Baa1 negative) announced that it will use approximately £1.1 billion from the £2.1 billion proceeds of the sale of Skandia Insurance Company Limited (financial strength A2 stable) to reduce leverage. While the sale reduces Old Mutual’s geographic diversification, and the group will become more reliant on South African earnings than it is today, Old Mutual’s greater ability to meet its original debt repayment targets and the announcement of a further £200 million debt repayment are credit positive.

Old Mutual also announced that it will make a £1 billion special dividend to shareholders once it completes the sale of its Skandia Nordic businesses. The remainder of the sale proceeds (£1.1 billion) will be utilised to reduce debt, subject to regulatory approvals. The debt reduction includes £900 million, which the company will deploy to ensure Old Mutual meets its original £1.5 billion debt repayment target by the end of 2012, of which approximately £600 million has already been repaid as of 31 January. The balance of approximately £200 million will go toward repaying debt, thus increasing the group’s debt repayment to £1.7 billion.

At year-end 2010, Old Mutual’s adjusted financial leverage was relatively low at 18.8%, and will benefit from the pending debt reductions. Furthermore, notwithstanding the lower future expected earnings of Old Mutual following the sale of the Nordic business, we expect earnings coverage to improve from the 2006-10 average figure of 6.8x owing to the lower interest burden.

However, the sale of the Nordic operations will reduce the group’s geographic and business diversification, with the group becoming increasingly reliant on South African revenues and earnings. In addition, the group may see slightly reduced group-level regulatory capitalisation. While the special dividend may also foster better access to capital markets in the future (i.e., through enhancing relationships with shareholders), other factors being equal, we typically consider large distributions as credit negative for bondholders because they reduce creditors’ buffer.
In aggregate, while we consider these developments to be modestly credit positive, they are not sufficient to return the ratings of Old Mutual Life Assurance Company (South Africa) Ltd. (OMLACSA), the main South African entity of the Old Mutual Group, and the group’s debt ratings outlook to stable. We assigned a negative outlook to these ratings on 22 November 2011, after we revised our South African A3 sovereign rating to negative from stable.

Since the announcement of the sale of the Nordic business, Old Mutual has announced a number of additional restructuring activities, including 1) the sale of its Finnish branch to Op-Pohjola (which it is due to complete by the end of second-quarter 2012), 2) the sale of Dwight Asset Management in the US to Goldman Sachs Asset Management (which is also due to be completed by the end of second-quarter 2012), and 3) the merging of Old Mutual’s Wealth Management continental Europe business (France and Italy) with Skandia’s Retail Europe business unit (Germany, Austria, Poland, and Switzerland). In isolation, and in aggregation, we do not consider these to be material for the ratings of the Old Mutual Group but consider them to be further positive steps in Old Mutual’s strategy to simplify its business and improve the effectiveness of its risk management.