Ohio Casualty Corp. is nearing the end of a covenant waiver extension and bankers expect the insurer to make a move to refinance, according to Insurance Finance & Investment, an LMW sister publication. Ohio Casualty has a $250 million credit line through J.P. Morgan Chase that contains a covenant requiring the company to maintain $750 million in statutory capital. That provision severely limits the company's flexibility, especially as its levels dropped to $765 million by year-end 2000. Earlier this year the insurer renegotiated the minimum statutory capital level down to $650 million only until the end of June. A spokeswoman for Ohio Casualty declined to comment, and calls to J.P. Morgan Chase were not returned by press time.
Standard & Poor's has downgraded the company to BB from BB+, downgraded its subsidiaries to BBB from BBB+ and placed all on rating watch negative. S&P analyst, Matthew Coyle cited the need to settle the credit issue as a key for the insurer in regaining a stable position, alongside improving operations and underwriting. Industry sources agreed solving the credit issue is the linchpin of the company's recovery plan. "Whenever you get a company in their position, it's a correct assumption that they're in the process of trying to refinance," an industry analyst familiar with the company said. One banker noted the insurer began looking earlier this year to refinance through a private debt placement but pulled the deal due to unfavorable market conditions. A source at another investment bank confirmed Ohio Casualty had been shopping around for a bank to lead a private deal, and mentioned J.P. Morgan Chase as a likely candidate.
Coyle said the insurer needs to deal with the credit issue soon with one of a few options: negotiating new terms with the lender, using dividends from subsidiaries to pay it off or refinancing. An industry source noted the lender already offered some latitude by relaxing the covenants. He added taking dividends from subsidiaries would put a further strain on capital, making refinancing the best bet. The source noted terming out the credit line would solve the issue, stabilize the insurer's rating and afford it time and capital flexibility for its restructuring efforts.