NEW YORK--(BUSINESS WIRE)--Fitch Ratings has completed a peer review of five rated traditional investment managers (IMs). Based on this review, Fitch has affirmed the following Long-term Issuer Default Ratings (IDR): Affiliated Managers Group, Inc. (AMG) at 'BBB', AllianceBernstein L.P. (AB) at 'A+', Invesco Ltd. (IVZ) at 'A-', Aberdeen Asset Management PLC (AAM) at 'A', and Schroders Plc (Schroders) at 'A+'. The Rating Outlook for AMG has been revised to Positive from Stable, while the Rating Outlooks for the remaining traditional IMs are Stable.
Please refer to company specific rating action commentary published today, and available on Fitch's website, for further rating rationale.
INDUSTRY OUTLOOK
The operating environment for traditional 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 position.
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.
MARKET APPRECIATION
Market appreciation over the last several years has increased the value assets under management, attracted asset inflows, improved margins given scale efficiencies and driven higher levels of management fees. These dynamics result in improved cash flow leverage (debt/EBITDA) metrics, even without changes in debt levels, given that EBITDA is the denominator. Fitch views lower leverage levels positively, but recognizes that with market value declines at other stages in the economic cycle, such cash flow leverage improvements can reverse themselves.
INTEREST RATE SENSITIVITY
Potential tightening of monetary policy by central governments could have a negative impact on equity and fixed income flows depending on the pace of which it occurs. Interest rate risk remains for managers with high exposure to fixed income AUM from unexpected rise in rates, which could potentially hurt investment performance and pressure flows. The magnitude of the interest rate impact for a given manager will depend on the extent to which their AUM is concentrated in fixed income offerings, the characteristic of such funds in terms of their interest rate sensitivity and the composition of the investor base. AB, with 56% of its AUM in fixed income assets as of March 31, 2014, has an above average exposure. However, Fitch believes AB's product and client diversity along with good investment performance in fixed income should help mitigate some of this pressure.
At a minimum, market value depreciation or outflows as a result of rising rates would reduce management fees and thus increase cash flow leverage. It could also create reputational risk for managers if performance is materially worse than peers. However, in the long term, rising rates accompanied by sustained economic growth should benefit equity assets and flows.
REGULATORY UNCERTAINTY
Traditional investment managers have historically avoided broad regulatory scrutiny due to the advisory nature of their business. However, the Financial Stability Oversight Council (FSOC) in the U.S. and the Financial Stability Board (FSB) in Europe are looking into possible systemic risks posed by large investment management firms and/or their funds, and whether such risks could be addressed through regulatory measures. While the outcome is highly uncertain, Fitch believes that increased regulation could be a positive for debtholders if higher explicit capital and liquidity requirements resulted, although it may necessitate material equity raises given the limited equity positions of most managers and negative tangible equity positions in certain instances. Profitability could also be adversely impacted depending on the extent to which increased capital/liquidity requirements or heightened transparency requirements affect IMs or their funds.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 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).
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