Standard & Poor’s downgrades Cunningham Lindsey’s credit rating

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on Cunningham Lindsey Group Inc. (LIN) to ‘B-‘ from ‘B’.
The outlook is negative.
“The downgrade reflects LIN’s weak earnings and cash flow, liquidity [that is] dependant on support from Fairfax Financial Holdings Ltd. (Fairfax, 75% equity owner), and sizeable debt obligations maturing in 2008,” said Standard & Poor’s credit analyst Damien Magarelli in a press release. “Also, LIN has undergone further operational changes and restructurings in 2006 that have increased expenses without generating increased revenues.”
Total obligations to total capital decreased in 2006 to about 67% from 72% in 2005, S&Ps noted, but this is still viewed as high leverage and is not expected to decrease significantly further in 2007.
LIN is a global claims services company with operations in Canada, the U.S., the U.K., Europe, the Far East, Latin America, and the Middle East. Fairfax owns more than 75% of LIN’s equity and has been providing financial support and liquidity to LIN.
Standard & Poors said its negative outlook reflects that LIN will be unable to service its maturing debt obligations in 2008 without external support, either from Fairfax or through refinancing.
Fairfax is supporting LIN’s bank facility obligations explicitly, but if it is determined that Fairfax will not continually extend its support to LIN, the rating would immediately decrease one notch, S&Ps said in a release. Also, if LIN is unable to initiate a clear plan toward refinancing its senior debt and bank facility obligations, the rating will fall another notch.
If LIN is able to refinance its debt obligations, and remove near-term liquidity concerns (interest payment and principal obligations), a stable outlook is possible. However, a sustainable track record of positive earnings and cash flow would also be a main consideration of a stable outlook.
S&Ps said it expects LIN will likely measure a small, pre-tax net profit in 2007, less than Cdn$1 million (unless a sizeable catastrophe occurs). The company is not expected to measure profits near 2005 levels as that year benefited from high catastrophe events as well as tax recoveries, S&Ps said.