On Wednesday, Standard & Poor's (S&P) downgraded its outlook on Janus Capital Group, Inc. ( JNS ) to 'Negative' from 'Stable'. Moreover, the rating agency affirmed the company's long-term issuer credit rating at 'BBB-'.
Reasons for the Downgrade
S&P stated that the downgrade was mainly driven by probable deterioration of profitability and key credit metrics this year, owing to continued net asset outflows. The outflows in fundamental equities and mathematical equities remain the headwinds.
Janus Capital's problem compounded as equities constituted roughly 82% of its assets under management (AUM), as of September 30, 2012. During the nine months period ended September 30, 2012, outflows of fundamental equities and mathematical equities were $7.7 billion and $4 billion, respectively.
According to the rating agency, the stumbling block for Janus Capital is improving its long-term investment performance. Janus Capital's profitability dropped during the first nine months of 2012 due to a decline in average AUM and an increase in negative performance fees. For the nine months ended September 30, 2012, Janus Capital's performance fees were negative $61.8 million, compared with negative $2.5 million in the prior-year period.
S&P anticipates that Janus Capital will face considerable difficulty in improving its long-term financial performance due to the persistent negative performance fees, which will negatively impact the company's profitability over the upcoming years.
However, S&P has maintained Janus Capital's long-term issuer credit rating. The affirmation of the rating depicts S&P's belief in the company's efforts to diversify its business by expanding the fixed income and international businesses. Further, the company's efforts to reduce its outstanding debt obligations during the past several years are encouraging. Moreover, Janus Capital is expected to considerably benefit from its strategic alliance with the Dai-ichi Life Insurance Company.
Rating Actions by other Agencies
In May 2012, Moody's Investors Service - a rating arm of Moody's Corp. ( MCO ) - upgraded the rating outlook to "stable" from "negative" besides affirming the Baa3 senior unsecured debt rating of Janus Capital. The ratings reflected Janus Capital's improved liquidity and healthy balance sheet.
Rating revisions play a major role in preserving investors' confidence in the stock and help boost the company's creditworthiness in the market. Though Janus Capital is addressing such issues, further rating downgrades are likely following pressure on credit quality and profitability.
Overall, we expect the company to perform well based on its healthy balance sheet and best-in-class investment boutique. Also, it has the potential to improve its AUM and revenue along with competitive leverage.
However, a tepid economic recovery, regulatory issues and the expectation of continued low interest rate environment are projected to limit the stock's upside potential in the upcoming quarters.
Janus Capital currently retains its Zacks Rank #3 (Hold).