Commenting on Sun Life Financial Inc.’s $560 million purchase of CMG Asia and CommServe Financial from the Commonwealth Bank of Australia, Moody’s Investors Service suggested the deal is likely a short-term negative, but could turn into a long-term positive.

Overall, Moody’s said it viewed the transaction as a slight credit negative in the medium-term, with potential upside in the long-term if the integration is successful and Sun Life can leverage its Hong Kong base to expand into China. The rating agency added that future acquisitions by the insurer that stress the company’s consolidated financial leverage and interest coverage ratios could negatively impact its outlook or ratings.

Moody’s highlighted several benefits of the proposed transaction. “The acquisition strengthens SLF’s franchise in Hong Kong, vaulting the life insurer to a market share rank of 7th overall from 19th prior to the acquisition, and nearly tripling the sales force to 1,700 agents. The combined operations will also enhance the base from which to further SLF’s expansion into greater China. Finally, the company reports that the transaction is accretive to earnings in 2006, which should improve its interest coverage,” it said.

However, Moody’s also noted that these positives are more than offset by several factors. “As a result of an expected increase in goodwill, SLF’s adjusted financial leverage will rise by an estimated 30 to 40 basis points (still within Moody’s expectations for the current ratings on SLF’s operating companies). Several integration risks will challenge the company in a region of significant strategic importance; among those are the integration of CMG’s and CommServe’s operations on SLF’s technology platform, the transitioning of CMG’s sales force to Sun Life, and retention of key staff. Also, SLF’s performance on the Canadian regulatory capital adequacy ratio will drop slightly following the transaction,” it cautioned.

The firms being acquired constitute CBA’s life insurance and pension operations in Hong Kong, which will be integrated with Sun Life’s existing operations in Hong Kong. The acquisition is expected to close in the third quarter of 2005, following approvals by regulatory authorities in Hong Kong, Canada, and Bermuda.

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