OREANDA-NEWS. Fitch Ratings has affirmed Man Strategic Holdings Limited's (Man) Long-Term Issuer Default Rating (IDR) at 'BBB+' with Stable Outlook. At the same time, Fitch has affirmed Man Group plc's (Man Group) USD150m Tier 2 subordinated (XS1103347701) notes at 'BBB'.

Man is a subsidiary of Man Group plc, a London-based investment manager.

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 Long-Term IDR primarily reflects Man's low balance sheet and cash flow leverage, sound operating margins, contained exposure to credit, market and liquidity risks, as well as an adequate franchise in alternative and, increasingly long-only, investment management. However, the rating also takes into account volatility in Man's earnings base (due to its more concentrated product offering relative to peers) as well as a larger share of more volatile performance fees than peers.

In 2015, Man's cash flow leverage (gross debt/trailing 12 months (TTM) EBITDA: 0.36x; net debt/TTM EBITDA: -1.1x) increased moderately as a result of lower adjusted EBITDA but remained well within Fitch's tolerance range for the rating.

Revenue in 2015 remained broadly unchanged (USD1.1bn), with a 6% increase in net management fees (to USD759m) offset by a 11% fall in performance fees (to USD302m). The bulk of Man's performance fees continue to come from quantitative strategies (largely AHL) where the vast majority of funds under management (FuM) is eligible for performance fees.

A 1% increase in net management fees lagged an 8% increase in FuM to USD78.7bn at end-2015 (USD78.6bn at end-March 2016), largely due to acquisitions throughout 2015 (adding USD6.1bn) and pressure on Man's gross management fee margin (down 25bps yoy to 106bps), which is partly due to a shift in Man's business mix. We expect further pressure on Man's fee margins due to above-average growth in lower-margin institutional FuM as well as general margin pressure in the industry.

Net FuM inflows in 2015 (USD0.3bn) were weaker than in 2014 (USD3.3bn) but picked up towards the end of the year and in 1Q16 improved to USD0.5bn. Reflecting the track record of Man's absolute and relative performance, net inflows were generally satisfactory in Man's quantitative (AHL, Numeric) and fund-of-hedge funds (FRM) strategies while net flows in the GLG divisions (both alternative and long-only strategies) remained negative.

Despite the completion of its cost-savings programme, Man's cost base increased markedly in 2015 (by around 13% yoy), reflecting a combination of adverse currency impact, acquisition-related costs and higher discretionary staff expense (which in the case of some GLG strategies is linked to gross and not net revenue). However, the adjusted EBITDA margin of management fees (27.2% in 2015) remained within management's target range (25%-40%).

Following several cash-funded acquisitions, notably of Numeric in 2014, Man's surplus liquidity and surplus regulatory capital remained adequate for the rating at end-2015.

The Stable Outlook reflects our expectation that Man's leverage will remain low and that its business model (and cost base) is sufficiently flexible and diversified to generate adequate revenue and profitability in most market conditions.

SUBORDINATED DEBT

Man Group's USD150m fixed-rate reset callable dated subordinated notes are irrevocably guaranteed on a subordinated basis by Man, and qualify as Tier 2 regulatory capital. They are rated one notch below Man's Long-Term IDR, in line with Fitch's applicable criteria.

The one notch reflects the notes' loss severity due to the subordinated nature of the notes. As the notes do not contain any coupon deferral features, Fitch has not applied any notches for incremental non-performance risk (relative to senior obligations). The notes are callable but do not contain any step-up language.

RATING SENSITIVITIES

Given Man's business model (including the reliance on performance fees) and moderate size (compared with higher-rated peers), upside for the ratings is currently limited.

Man's earnings base and cash flow leverage remain more vulnerable to market dislocations than those of its higher-rated investment manager peers. Consequently, Man's ratings are primarily sensitive to markedly higher cash flow leverage as a result of either weaker EBITDA generation or materially higher debt.

Man is more acquisitive than its peers but acquisitions to date have generally been funded by surplus capital, are well-executed and swiftly integrated. However, a sizeable debt-funded acquisition would put pressure on Man's ratings.

Downward pressure could arise from sustained underperformance in one or several of its business lines leading to net outflows and weakened profitability. A material reduction in Man's net cash position or a sizeable operational or reputational loss would also be negative for its ratings.

SUBORDINATED DEBT

The rating of the subordinated notes issued by Man Group is primarily sensitive to a change in Man's Long-Term IDR. Fitch does not rate Man Group. Double leverage at the holding company, Man Group, was low at end-2015 (98%) and we expect it to remain within acceptable tolerance levels (120% as per applicable criteria).

The notes' rating is also sensitive to changes in Fitch's assessment of loss severity of the notes or of the risk of their non-performance relative to the risk captured in Man's Long-Term IDR.