NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Affiliated Managers Group, Inc.'s (AMG) long-term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is revised to Positive from Stable. A full list of rating actions is provided at the end of this release.
The operating environment for traditional investment manager (IMs) remains favorable, driven by improved global equity markets that have lifted assets under management (AUM) levels and attracted investor flows. This has resulted in good fee revenue generation, improved investment performance and stable operating margins, supported by continued cost discipline.
Leverage levels have generally declined, and in some cases been reduced to zero, driven by improved cash flow generation and debt repayment. Many traditional IMs have taken advantage of favorable capital markets and low interest rates to refinance debt at attractive spreads, which should improve interest coverage. Liquidity remains strong, with most traditional IMs operating at or near negative net debt.
These positive trends are tempered by the cyclical nature of market value appreciation, potential performance and reputational risks in a rising interest rate environment, and regulatory uncertainty surrounding IMs and/or their funds.
KEY RATING DRIVERS - IDRs AND SENIOR DEBT
The affirmation reflects AMG's strong financial and credit profiles including significant AUM scale and affiliate diversity, strong cash flow generation, and improved leverage and interest coverage metrics. Ratings take into account AMG's acquisitive business model and AUM concentration in equities, which is a relatively more volatile asset class.
The Positive Outlook reflects the potential for positive rating momentum over a 12-24-month horizon if AMG is able to sustain the improvements in leverage it has made over the last three quarters, while continuing to increase scale and diversity, and remain disciplined with respect to pricing and funding future acquisitions.
AMG's growth in size and scale continues to outpace the industry, with aggregate affiliate AUM increasing 28.4% to $594 billion (pro forma for pending acquisitions) in first quarter 2014 (1Q'14) from $463 billion in 1Q'13, driven by robust organic flows ($36 billion), market appreciation ($51 billion), and new acquisitions ($47 billion). Although, the recent strong performance in global equity markets has helped AMG's equity-oriented affiliates, Fitch notes the affiliates' strong investment performance through the years has led to 16 consecutive quarters ($110 billion) of aggregate positive organic flows. Fitch believes AMG is well positioned for a broad rotation or allocation to risk assets such as domestic equities.
AMG strategy to reinvest excess cash flows into making accretive investments in affiliates versus dividends or share buybacks has resulted in robust cash flow generation. Adjusted EBITDA for trailing 12 months (TTM) ended 1Q'14 grew 50% to $921 million, from $613 million at year-end 2012. Fitch notes that AMG benefited from high performance fee contribution during this period, which tends to be a volatile source of earnings.
AMG's leverage, as measured by debt-to-adjusted EBITDA, improved to 1.47x at TTM 1Q'14 from 2.43x at year-end 2012, despite the closing of two new acquisitions. Similarly, interest coverage strengthened to 11.4x for TTM 1Q'14, from 7.4x at year-end 2012. Leverage is below management's revised articulated leverage target of 2.0x, and Fitch expects management to operate with a healthy leverage cushion to factor in any new acquisitions or absorb any unexpected material decline in equity markets.
AMG has also taken steps to simplify, diversify, and lengthen its funding structure. Since 2Q13, AMG called and redeemed $460 million of its senior convertible notes in cash, called and redeemed $300 million of its junior convertible trust preferred securities in equity, and accessed the institutional debt markets by issuing $400 million of 10-year senior notes. Fitch believes that in aggregate these actions have helped simplify AMG's debt structure, reduce leverage, and improved the company's financial flexibility.
RATING SENSITIVITIES - IDRs AND SENIOR DEBT
Ratings could be upgraded if AMG is able to maintain leverage below its long-term articulated long-term leverage target of 2.0x, on a sustained basis, while maintaining solid investment performance at the affiliate level.
Aggressive acquisitions funded by increased debt levels, deterioration in leverage or interest coverage ratios beyond management's articulated target range, prolonged investment underperformance at major affiliates, significant liquidity strains caused by affiliate equity puts, and/or unexpected operational losses or significant net outflows could lead to negative rating action.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The $430.8 million of junior trust preferred securities issued by AMG are notched down from the company's IDR. Therefore, its 'BB' rating has been affirmed, alongside the IDR, and is sensitive to any change in the IDR.
The ratings are in accordance with Fitch's criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis', and the three-notch differential from the IDR reflects Fitch's view of the subordinated nature and interest deferral feature of this hybrid security.
Fitch has affirmed the following ratings:
Affiliated Managers Group, Inc.
--Long-term IDR at 'BBB';
--Senior unsecured notes at 'BBB';
--Senior bank credit facility at 'BBB'.
AMG Capital Trust II
--Trust preferred securities at 'BB'.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (January 31, 2014);
--'Investment Manager and Alternative Funds Criteria' (Dec. 12, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis ' (Dec. 23, 2013)
--2014 Outlook: Investment Managers and BDCs (November 2013)
--Traditional U.S. Investment Managers - A Comparative Analysis (July 2013)
Applicable Criteria and Related Research:
Traditional U.S. Investment Managers - A Comparative Analysis
2014 Outlook: Investment Managers and BDCs (Solid Operating Margins Offset Moderate Market Pressures)
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Investment Manager and Alternative Funds Criteria
Global Financial Institutions Rating Criteria