Australia Ratings has reviewed and affirmed its credit rating of ‘BBB+’ on the Australian Unity Notes (AUNs; ASX code: AYUHA), issued by AUL. This rating is the highest long-term rating in the intermediate category of creditworthiness on the rating scale of Australia Ratings (see the rating scale below). The AUNs are unsecured debt obligations of the issuer, Australian Unity Limited (AUL).
Australia Ratings also confirmed its product complexity indicator of ‘GREEN’ on the AUNs indicating that Australia Ratings considers the AUNs to be a debt investment with simple and straight forward terms and conditions.
“The ‘BBB+’ rating on the AUNs primarily reflects the assessed credit quality of both their issuer, Australian Unity Limited and the wider Australian Unity Group” said Australia Ratings’ credit analyst, Chris Cudsi. Mr Cudsi added, “In 2014, we expect Australian Unity to maintain the level of profitability achieved in 2013”.
AU’s earnings rose in 2013, as improved investment returns attributable to stronger asset markets offset significantly higher claims costs in AU’s health insurer. Net profit after tax (NPAT) for 2013 was A$29.4 million, compared with A$22.3 million for the previous corresponding period.
The Australian Unity Group is a diversified mutual specialising in the provision of healthcare (mainly, health insurance), financial services and retirement living.
The credit rating reflects the following key strengths of AUL’s business:
- Robust and competitive healthcare arm that generates over 60% of adjusted EBITDA
- Prudent and moderately conservative risk appetite with regard to gearing levels and maintenance of buffers above regulatory capital requirements
- Increasing diversification benefits of continued expansion into Retirement Living, Financial Services and Big Sky Building Society businesses
The credit rating also reflects the following key risks to AUL’s business:
- All three of the Australian Unity Group’s major businesses (Healthcare, Financial Services ‑ including Big Sky Building Society – and Retirement Living) operate in areas subject to significant regulatory scrutiny and/or political pressure to minimise price increases
- Increasing exposure to project and construction risks inherent in property development within the Retirement Living business
- Restricted financial flexibility, given Australian Unity Limited’s mutual status precludes future equity raising
The ‘GREEN’ Product Complexity Indicator of bonds is confirmed. A GREEN designation indicates the terms and conditions of the AUNs are simple and straightforward with a very low level of complexity on Australia Ratings’ five point Product Complexity Indicator scale.