Fitch Ratings Places LandAmerica on Rating Watch Negative
April 5, 2006
CHICAGO (BUSINESS WIRE) - Fitch Ratings has placed LandAmerica Financial Group (LFG) and its insurance subsidiaries on Rating Watch Negative following LFG's recently announced plan to acquire Capital Title Group Inc. (CTGI). (See complete list of ratings below)
The Negative Rating Watch reflects Fitch's ongoing concerns about LFG's ability to profitably execute its acquisition strategy. Fitch is concerned about the size of the purchase price premium relative to reported book value given that the acquisition is being consummated at the peak of the real estate cycle; and that this transaction would significantly increase intangibles, especially given LFG's historical and recent write-down of intangibles.
Fitch also notes the negative ramifications the acquisition may have on the organization's already weakening balance sheet fundamentals. The $251 million purchase price is expected to be funded 80% cash and 20% common equity. The cash is expected to be obtained 50%/50% from internal cash sources and debt. Proforma adjusted debt/capital increases to 22.5% from 17.6%, fixed charge coverage decrease to 7.8 times (x) from 8.6x and intangible equity/capital, which has doubled over the past five years, increases to 45%. If 80% of the acquisition is fully funded by debt, adjusted debt/capital and fixed charge coverage would be approximately 26% and 7.7x, respectively.
Based on current information, if the Rating Watch is resolved with a downgrade, Fitch does not believe the ratings will be downgraded more than one notch at the close of the acquisition.
LFG is the third largest provider of title insurance in the United States with a market share of approximately 18%. The organization has a strong market position in residential and commercial title insurance, and its title operations are well diversified geographically. LFG, a publicly traded holding company, with GAAP assets and shareholder's equity of $3.9 billion and $1.3 billion, respectively at Dec. 31, 2005, provides title insurance and real estate products in the U.S., Canada and the Caribbean.
The following ratings have been placed on Rating Watch Negative by Fitch:
- LandAmerica Financial Group, Inc.
- Long-term Issuer Default Rating (IDR) 'BBB+'
- Senior debt 'BBB';
- Insurer Financial Strength 'A';
- Commonwealth Land Title Insurance Company
- Commonwealth Land Title Insurance Company of New Jersey
- Land Title Insurance Company of Pasadena
- Lawyers Title Insurance Corporation
- Title Insurance Company of America
- Transnation Title Insurance Company
- Transnation Title Insurance Co. of New York.
- Insurer Financial Strength 'A'.
Soure: Fitch Ratings