NEW YORK--(BUSINESS WIRE)--ne 2015: (This announcement amends a previous release regarding Affiliated Managers Group, Inc. (AMG) published June 15, 2015. The changes primarily include clarifying language with respect to Fitch's assessment of AMG's EBITDA. AMG's assets under management (AUM) figures have also been corrected to reflect period-ending AUM rather than average AUM.)
Fitch Ratings has upgraded AMG's long-term Issuer Default Rating (IDR), senior unsecured debt and senior bank credit facility to 'BBB+' from 'BBB' and revised the Rating Outlook to Stable from Positive. A full list of rating actions is at the end of this release.
These actions have been taken by Fitch in conjunction with a broader traditional investment manager industry review, which includes seven publicly-rated traditional investment managers. For more commentary on the broader sector review, please see 'Fitch Completes Traditional Investment Manager Review; Upgrades AMG and Man; Revises Invesco to Positive', available at 'www.fitchratings.com'.
KEY RATING DRIVERS
IDR AND SENIOR DEBT
The upgrades of the IDR, senior unsecured debt and senior bank credit facility to 'BBB+' from 'BBB' reflect AMG's continued strong financial performance, cash flow generation, AUM inflows and execution, driven by a consistent operating strategy and affiliate and AUM diversity. AMG maintains a favorable competitive position in the affiliated manager space, with revenue sharing agreements which reduce downside risk to the company. These attributes have led to improved interest coverage (adjusted EBITDA/interest expense) and a demonstrated ability to manage leverage (adjusted debt to adjusted EBITDA) below 2.0x, consistent with the lowered targets articulated by AMG in 2013 and 2014.
Primary ratings constraints include AMG's acquisitive business model, which results in periodic increases in leverage, AUM concentration in equities, which is a relatively more volatile asset class and can lead to variability in management fee streams, and leverage and interest coverage that although improved, remain weaker relative to more highly rated peers. A component (historically 5-10%, on average) of AMG's earnings stem from performance fee contributions from affiliates, which tend to be a more volatile source of earnings. These constraints are incorporated into Fitch's Stable Outlook for AMG.
AMG's AUM growth remains strong, with aggregate affiliate AUM increasing 13.5% to $632 billion at 1Q15 from $557 billion at 1Q14, driven by new investments ($37.1 billion), organic flows ($19.7 billion) and market appreciation ($15.3 billion). The most notable recent investment was AMG's December 2014 follow-on investment in AQR Capital Management, LCC, a quantitative-based investment manager with $131.6 billion of AUM at March 31, 2015.
Although the recent strong performance in global equity markets has helped AMG's equity-oriented affiliates, Fitch also notes that the consistently strong investment performance of AMG's affiliates has led to 20 consecutive quarters of aggregate positive organic flows totalling $129.5 billion. Fitch believes AMG is well positioned for a broad rotation or allocation to risk assets such as global equities.
AMG's primary strategy is to reinvest excess cash flows into accretive investments in affiliates, although as AMG has achieved increased scale and cash flow generation, share repurchase activity has increased. Given AMG's strong cash flow generation capabilities, Fitch views managed share repurchase activity, particularly during periods of reduced investment activity, as manageable. Adjusted EBITDA for the trailing 12 months (TTM) ended 1Q15 grew 9.1% to $962 million, from $882 million for TTM1Q14. Adjusted EBITDA figures do not reflect the potential run-rate EBITDA contributions from recent acquisitions.
Fitch calculates that AMG's leverage, as measured by debt-to-adjusted EBITDA was 1.91x at TTM 1Q15, up from 1.43x at YE14, primarily reflecting increased debt associated with the AQR acquisition. Interest coverage improved to 11.9x for TTM 1Q15, from 9.9x at year-end 2014, reflecting increased EBITDA generation.
Leverage remains below the company's stated target of 2.0x, which is viewed positively both in terms of the absolute level of leverage relative to the ratings, as well as in terms of management's ability to manage levels within its stated target range. Fitch expects AMG to manage leverage taking into account potential new acquisitions and declines in market valuations.
Fitch has articulated quantitative leverage benchmarks for the 'A' category of 1.5x or less for traditional investment managers and 2.5x or less for alternative investment managers. Given AMG's unique business model, affiliate diversity, increased exposure to alternative investment AUM and EBITDA durability, Fitch believes there is the potential to evaluate AMG's leverage under a combination of both benchmarks over a longer-term horizon, although this would be conditioned upon the growth of committed capital-based management fees emanating from alternative investment AUM, continued net inflows across the platform as a whole and continued adherence to AMG's stated leverage target.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The $430.8 million of junior trust preferred securities issued by AMG have been upgraded to 'BB+' from 'BB', maintaining the three notch differential from AMG's IDR. The three-notch differential reflects Fitch's view of the subordinated nature and interest deferral feature of this hybrid security in accordance with Fitch's criteria 'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis'.
IDR AND SENIOR DEBT
Ratings could potentially 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 increasing the contribution of alternative investment base management fees and maintaining solid investment performance and positive inflows at the affiliate level. Continued increases in scale, diversity, EBITDA margins and interest coverage, while remaining disciplined with respect to pricing and funding of future acquisitions could also contribute to positive rating momentum. Given AMG's higher leverage levels and lower interest coverage levels relative to 'A' category peers, if AMG were to be upgraded, it would likely be towards the lower end of the 'A' category.
Aggressive debt-funded acquisitions, 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.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The rating assigned to the junior trust preferred securities is linked to AMG's IDR and therefore, is sensitive to any changes in AMG's IDR.
Fitch has taken the following rating actions:
Affiliated Managers Group, Inc.
--Long-term IDR upgraded to 'BBB+' from 'BBB';
--Senior unsecured notes upgraded to 'BBB+' from 'BBB';
--Senior bank credit facility upgraded to 'BBB+' from 'BBB'.
AMG Capital Trust II
--Trust preferred securities upgraded to 'BB+' from 'BB'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)