North American selloff could save broker

Julie Herman

Cooper Gay Swett & Crawford Ltd.'s plan to sell most of its North American business, including wholesale brokerage Swett & Crawford, may be the most prudent move for the company's survival, observers say.

The London-based reinsurance brokerage in mid-November said it had put up for sale Swett & Crawford, with which Cooper Gay merged in 2010, along with Houston-based J.H. Blades & Co. Inc., Toronto-based Creechurch International Underwriters Ltd. and an undisclosed U.S. reinsurance broker.

Cooper Gay said it would keep its Miami hub office, while its Latin American operation will remain part of Cooper Gay's international business.

For the 12-month period ending in June 2015, Cooper Gay posted revenue of $369 million, down 4.7% from a year earlier, according to credit research by Moody's Investor Service Inc. Cooper Gay said it would use the proceeds to reduce its debt of approximately $500 million, according to Moody's.

Selling the North American division, which provides some 60% of revenue and 78% of earnings, may be a savvy survival tactic, observers say.

“Selling your most valuable asset makes sense if it improves the balance sheet to the point that the entire enterprise will survive,” said Timothy J. Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C. “You might be selling the jewel in the crown, but better to sell the jewel and survive as an entity than let the whole ship go down.”

“Clearly, this is a big move for them because the North American business is their moneymaker,” said Julie Herman, New York-based associate director of insurance rating at Standard & Poor's Corp. “The North American division is the one that probably has the most value in … terms of the market valuation it could get.”

“There's plenty of buyers out there, and it's one way to raise cash,” said Gretchen Roetzer, director and group operations head at Fitch Ratings Inc. in Chicago.

Ms. Roetzer and Ms. Herman said the appetite for U.S. acquisitions has been strong.

“Firms are trading at record-high multiples, and there are plentiful, likely private equity-backed ventures,” said Mr. Cunningham. “You've got a well-capitalized stable of potential buyers, and record-high valuation multiples, so you kind of be opportunistic and take advantage of that right now.”

“Tangentially, part of the well-capitalized buy-side group is also impacted by relatively inexpensive debt capital, and interest rates are only going to creep up if the Federal Reserve does something the next time they meet,” said Mr. Cunningham. “Debt capital is very plentiful and fairly inexpensive.”

“The cost of debt is still historically low,” said Ms. Roetzer.

“A sale would facilitate paying down a chunk of the debt and leave the residual with a better chance” to survive and thrive, said Eamonn Flanagan, head of the Liverpool office for Shore Capital Group Ltd. “This sounds like the company putting a positive gloss on a very tricky situation. However, it is correct in saying that a breakup is the best option for survival given the debt,” said Mr. Flanagan.

“If the company uses the proceeds of the sale to reduce or eliminate company debt, you largely fix the leverage overhang, and I think that will free up the company focus to better attract producers and new business,” said Ms. Herman.

“This sale will substantially shrink Cooper Gay and allow the company to pay off most or all of its debt,” said Bruce Ballentine, vice president and senior credit officer at Moody's Investors Service Inc. in New York. “We believe their goal is to go forward with an international operation with little or no debt.”

Both S&P and Moody's said they will review Cooper Gay's credit rating for potential revisions depending on the outcome of the sale process, something Cooper Gay said it welcomes.

“We have a very open dialogue with the rating agencies and were happy to see the recent comments from S&P and Moody's responding to our proposed sale of the group's North American business,” Phil Rock, Cooper Gay's London-based chief financial officer, said in an email. “S&P's decision to place us on CreditWatch developing from a negative outlook is welcome, as is their acknowledgment that they would consider raising the rating if the company's credit profile shows material improvement resulting from the proceeds from a potential transaction going toward material debt repayment — which is our expectation.”

“Moody's confirms our own view that a favorable sale would allow CGSC to repay most or all of its facilities, and they would expect to withdraw ratings after that event,” he said.