News Column

Fitch Revises Harbinger Group's Outlook to Positive on Recent Capital Actions

June 6, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Harbinger Group, Inc. (Harbinger or HRG) at 'B' and revised the Rating Outlook to Positive from Stable. Fitch has also upgraded HRG's senior secured debt to 'BB-/RR2' from 'B/RR4'. A full list of rating actions follows at the end of this press release.

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 $391 million (accreted par value) of outstanding preferred stock into common shares improves HRG's leverage, as calculated by Fitch. The preferred stock was not awarded any equity credit under Fitch's analysis, due to its cumulative 8% dividend and cash redemption in 2018. Pro forma for the preferred share conversion, Fitch estimates HRG's debt-to-equity ratio is 0.8x, down significantly from to 2.2x as of March 31, 2014. The conversion also eliminates $32 million in annual dividends and removes a significant cash obligation that was due in 2018.

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 $604 million of senior secured notes due July 2019 and $550 million of senior unsecured notes due January 2022.

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 Harbinger Capital Partners LLC and its affiliates has been reduced to 21%, down significantly from prior amounts. The concentration of ownership in a hedge fund operated by the CEO of HRG has historically been viewed as a rating constraint.

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 Fidelity & Guaranty Life Holdings, Inc. (F&G, 'BB', Outlook Stable) as well as the EXCO/HGI JV. HRG's liquidity position benefits from holding company cash of $372 million (as of March 31, 2014), although a portion of this cash balance is expected to be used for acquisitions and/or to fund shareholder distributions over time.

Harbinger's recently announced authorization for a $100 million share repurchase program is viewed negatively by Fitch. However, even if executed in full, the buyback would have a relatively modest impact on the firm's leverage. Fitch expects the potential impact on the debt-to-equity ratio to remain under 10 basis points.

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 $29.3 billion. HRG was established as a permanent capital vehicle to obtain controlling equity interests in established, dividend-paying businesses that operate across a diversified set of industries. The company currently operates in four business segments: consumer products through its 59% ownership in Spectrum Brands, insurance through its 80% ownership in F&G, the EXCO/HGI JV, an energy partnership, and Salus, an asset based lending business.

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'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Investment Manager and Alternative Funds Criteria' (Dec. 12, 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833414

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Ilya Ivashkov, CFA

Senior Director

+1-212-908-0769

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Brendan Sheehy

Senior Director

+1-212-908-0138

Secondary Analyst

or

Tertiary Analyst

Grace Barnett

Director

+1-212-908-0718

or

Committee Chairperson

Nathan Flanders

Managing Director

+1-212-908-0827

or

Media Relations

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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