Affiliated Managers Ratings Affirmed by Moody's, Outlook Down
Affiliated Managers Group, Inc.’s AMG ratings have been affirmed by Moody's Investors Service. However, the company’s rating outlook has been downgraded to negative from stable.
The senior unsecured rating has been affirmed at A3, while the junior subordinate rating is at Baa1.
Concurrently, Affiliated Managers’ new junior subordinated notes maturing in 2060 have been assigned a rating of Baa1.
Rationale Behind Ratings Affirmation
Affiliated Managers, with its strong balance sheet and liquidity position, has considerable capability to invest in other companies and is expected to continue generating meaningful growth through new investments.
Of late, it has been targeting investments in alternatives and global strategies, given the strong preference of investors for the same.
Notably, since the past several years, the company, through a multi-affiliate investment strategy, has been acquiring majority and minority equity positions in boutique firms but has always left significant ownership in the hands of its affiliates' management teams.
Through this approach, it has been able to attract successful asset management firms that value the ongoing opportunity to participate in and to further capitalize on their growth.
Thus, the ratings affirmation reflects Affiliated Managers’ scale, diversity and profitability.
On the whole, the company’s affiliates manage more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, alternative and fixed income products. As of Jun 30, 2020, the company had total assets under management (AUM) of $638.4 billion.
Reasons Behind Outlook Downgrade
Affiliated Managers’ affiliates have been witnessing a steady increase in net outflows over the past several months. In 2019, net client cash outflows were $53.5 billion, which resulted in a decline in AUM balance. Likewise, outflows continued in the first six months of 2020, which resulted in a further plunge in the AUM balance on a year-over-year basis.
Because of this, the company has been facing revenue pressure of late. Amid a challenging operating backdrop and significant market volatility, its revenues declined 5.8% in 2019, with the continuation of the same trend in the first half of 2020.
As a result of the above-mentioned shortfalls, the company’s profit has reduced and leverage has increased. Per Moody’s, leverage has recently exceeded 2.5X, which breaches the threshold that the rating agency considers key to the maintenance of the company’s current rating.
Because of these negatives, the rating outlook has been downgraded.
However, over the outlook period, Moody's will likely monitor steps that Affiliated Managers may take to reduce leverage to a level that Moody’s considers consistent with an A3 rating.
The steps may include deploying available liquidity for acquisitions that are earnings accretive or repaying amounts on its term loan facility.
When Can the Rating be Upgraded?
It is unlikely that the company’s ratings will be upgraded, while the outlook is negative. Nevertheless, with a stable outlook, ratings might be affirmed if the company’s debt/EBITDA declines sustainably below 2.5X or if there is an improvement in AUM stability, consistent with improved net sales, or if the company engages in acquisitions that are earnings accretive.
What Could Lead to a Rating Downgrade?
Ratings might be downgraded if over the next 12-18 months, the company’s leverage is sustained above 2.5X, or if there is a decline in scale due to market events, performance weakness or AUM instability, or there is any breach in the cooperative relationship between the company and its leading affiliates.
Over the past six months, shares of Affiliated Managers have gained 24.1% compared with a rise of 36.3% of the industry it belongs to.
Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Apart from Affiliated Managers, Moody’s recently downgraded the outlook for U.S. Bancorp USB due to its assessment that the lender’s balance sheet strength and profitability gap with its US peers could narrow due to the coronavirus pandemic.
For TCF Financial TCF, its outlook was upgraded, reflecting Moody's view that the integration with Chemical Financial has been well-executed despite the large size of the transaction.
On the other hand, the outlook for SLM Corporation SLM has been kept as stable.
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