KEY RATING DRIVERS - IDR
The revised Outlook follows the completion of several transactions recently executed by HRG, which have improved the company's credit profile, in Fitch's view. These transactions have resulted in a stronger capital structure and a more diversified ownership base for the company. The Positive Outlook is further supported by the stable performance of HRG's underlying businesses. While these factors are positive from a quantitative perspective, more immediate upward rating momentum is tempered by HRG's limited track record of operation under more conservative financial metrics, combined with the potential for opportunistic acquisitions or other activities which could alter HRG's risk profile.
The recent conversion of the company's
The company recently announced that its tender offer to convert a portion of its senior secured debt into senior unsecured debt was successful. This transaction improves the company's debt maturity profile and funding flexibility given that a greater portion of HRG's balance sheet is now unencumbered. Once the tender offer is completed, the company will have approximately
Over the past several quarters, Leucadia National Corp. ('BBB-', Outlook Stable) has accumulated a significant ownership stake in Harbinger, equal to approximately 20% of outstanding shares. The increased diversity in HRG's ownership group is viewed positively by Fitch. In particular, the percentage of shares owned by
Fitch expects HRG's interest coverage to remain in the 1.0x to 1.5x range over the near to intermediate term. This ratio has improved over the past two years due to higher dividend distributions by the company's subsidiaries. The FY 2013 coverage ratio of 1.7x was elevated due to large nonrecurring distributions from
Harbinger's recently announced authorization for a
KEY RATING DRIVERS - Senior Secured Debt
The upgrade of HRG's senior secured debt to 'BB-/RR2' from 'B/RR4' reflects improved coverage ratios and recovery prospects as a result of the reduction in total secured debt outstanding. Recovery prospects are further enhanced by continued growth in the value of the company's equity investments, although this is largely due to market appreciation, which can reverse under stress.
KEY RATING DRIVERS - Senior Unsecured Debt
Harbinger's unsecured debt is effectively subordinated to the company's senior secured debt, which has a blanket lien on most of the company's assets. After the conversion of secured debt, Fitch estimates the proportion of unsecured debt to total debt will improve to 48% from 13%. While Fitch views the reduction in balance sheet encumbrance positively, it continues to assign an 'RR4' Recovery Rating to the unsecured debt, based on its analysis of Harbinger's balance sheet investments. This results in equalization of the senior unsecured debt rating with the IDR of 'B'.
RATING SENSITIVITIES - IDR
In resolving the Positive Rating Outlook, Fitch will primarily focus on HRG's ability to maintain or improve its current financial metrics, while deploying existing cash balances in a measured manner which does not adversely impact the company's risk profile or materially alter its operating strategy.
The following developments could result in potential long-term upward rating momentum in HRG's IDR:
--Prudent deployment of balance sheet cash and further diversification of investments;
--Improvement in parent company interest coverage to over 1.5x on a sustained basis;
--Leverage (debt-to-equity) at the parent level maintained at or below current levels, reflective of the recent capital actions.
The following drivers could result in downward pressure on HRG's IDR and/or removal of the Positive Rating Outlook:
--Increase in risk appetite in the company's future cash deployment;
--Significant increase in parent company leverage;
--A sustained reduction in interest coverage below 1.0x;
--Deterioration in operating performance at any of HRG's significant subsidiaries, which results in a material decline in their value, dividend capacity and/or credit ratings.
RATING SENSITIVITIES - Senior Secured Debt
The senior secured debt rating of 'BB-/RR2' is sensitive to potential changes in the company's IDR. Furthermore, the secured debt rating is sensitive to changes in the level of available asset coverage. Fitch has assigned a 'RR2' Recovery Rating to HRG's secured debt, which results in a two-notch uplift from the IDR.
RATING SENSITIVITIES - Senior Unsecured Debt
The senior unsecured debt rating of 'B/RR4' is sensitive to potential changes in the company's IDR. Furthermore, the unsecured debt rating is sensitive to changes in the level of available asset coverage. Fitch has assigned a Recovery Rating of 'RR4' on HRG's unsecured debt, which results in equalization with the IDR.
HRG is a publicly traded investment holding company with consolidated assets of
Fitch has affirmed the following ratings:
Harbinger Group, Inc.
--Long-term IDR at 'B', Outlook to Positive from Stable;
--Senior unsecured notes at 'B/RR4'.
Fitch has upgraded the following ratings:
Harbinger Group, Inc.
--Senior secured notes to 'BB-/RR2' from 'B/RR4'.
Additional information is available at 'www.fitchratings.com'.
--'Global Financial Institutions Rating Criteria' (
--'Investment Manager and Alternative Funds Criteria' (
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria
Source: Fitch Ratings
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