Fitch Affirms Aberdeen Asset Management at 'A', Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed UK-based Aberdeen Asset Management Plc's (AAM) Long-Term Issuer Default Rating (IDR) at 'A' and Short-Term IDR at 'F1'. The Outlook is Stable. At the same time, AAM's subordinated perpetual cumulative notes have been affirmed at 'BBB'.
These rating actions were undertaken as part of Fitch's global peer review of traditional investment managers. For more information on the peer review, refer to the commentary "Fitch Completes Traditional Investment Manager Global Peer Review" dated 9 June 2016.
KEY RATING DRIVERS
The IDRs reflect AMM's low leverage, solid capitalisation, a fairly diversified franchise, resilient margins on AAM's assets under management (AuM) and adequate liquidity. However, the ratings also take into account ongoing net new asset outflows including in AAM's important equities and emerging markets (EM) equities businesses, which are putting pressure on earnings generation. The ratings also factor in the under-performance relative to benchmarks in some of AAM's key asset classes, notably Asia Pacific and global equities.
In the two years to March-2016, AAM's net outflows amounted to around GBP62bn or 19% of assets under management (AuM) at end-March 2014. Total AuM declined by GBP31.7bn (or close to 10%) in the same period to GBP292.8bn at end-March 2016 with positive market and currency effect mitigating net outflows to some extent. Around half of net outflows related to AAM's high-margin equities business with the remainder from AAM's solutions (multi asset) and fixed income businesses. Reflecting improved investor sentiment towards EM assets, gross inflows stabilised while net outflows decelerated in 2015 and 1Q16, notably in equities. We expect net flows to slow down further in 2H16.
Markedly lower average AuM led to operating revenue declining 20% yoy in the six months to March 2016 while operating expenses fell 6% yoy. This resulted in a 35% reduction in AAM's EBITDA and a 10pp drop in its EBITDA margin to a still acceptable 38%. In early 2016, management announced additional cost saving measures which - if fully implemented - should restore EBITDA margin to 2014 levels.
As a result of lower EBITDA, cash flow leverage (gross debt/EBITDA) also worsened in the six months to March 2016 to 0.57x (from 0.29x at end-March 2015 and 0.4x at end-2015) but remained comfortable within the Fitch tolerance range for AAM's rating (below 1.5x for the 'A' category). Overall leverage benefits from low outstanding debt (at end-March-2016, AAM's had GBP422m subordinated debt outstanding to which Fitch assigns 50% equity credit and therefore only includes 50% in its debt calculations).
AAM's regulatory capital remained broadly unchanged (GBP553m at end-March 2016) and surplus capital (above Pillar 2 requirements) improved to a sound GBP218m at end-March 2016, after having been modestly reduced by a number of smaller acquisitions in late 2015.
The Stable Outlook on AAM's Long-Term IDR reflects our view that management should be able to maintain AAM's current profitability in the short-term (and improve it in the medium-term) through a combination of markedly reduced net outflows, resilient AuM margins and successful cost savings measures.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
AAM's USD500m perpetual cumulative subordinated instruments receive 50% equity credit and are rated three notches below the company's IDR, in accordance with Fitch's criteria for the "Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis". A hybrid instrument with easily activated going-concern loss absorption would normally be rated at least three notches lower than the issuer's Long-Term IDR. AAM's GBP100m additional Tier 1 notes (5% trigger; not rated) issued in 2015 also receive 50% equity credit in line with Fitch's criteria.
RATING SENSITIVITIES
Given current pressure on AAM's profitability, upside is limited in the medium-term. In the longer-term, positive rating momentum would require a sustained reversal of net flows (resulting in increasing average AuM), improved operating margins and better earnings diversification by increasing the contribution from AAM's solutions and fixed income businesses.
Downward pressure on AAM's ratings could arise if net outflows continue at their current pace, leading to lower profitability and higher cash flow leverage. Inability to improve the performance of key asset classes (notably global and APAC equities) relative to benchmarks, an increase in staff attrition (including the departure of key investment staff) or inability to attract sufficient volumes of EM-related gross inflows once investor sentiment has recovered could indicate that AAM's franchise has suffered structural damage as a result of continued EM-related net outflows would also be rating-negative.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
AAM's subordinated debt rating is broadly sensitive to the same considerations that might affect the company's IDR. The securities' rating is also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in AAM's IDR.
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