June 7, 2017 / 8:27 PM / in 2 months

Fitch Affirms Azimut at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 07 (Fitch) Fitch Ratings has affirmed Azimut Holding S.p.A's (Azimut) Long-Term Issuer Default Rating (IDR) at 'BBB' and Short-Term IDR at 'F2'. The Outlook on the Long-Term IDR is Stable. Azimut's senior unsecured bonds have also been affirmed at 'BBB'. These rating actions were undertaken as part of Fitch's global peer review of traditional investment managers. For more information on the peer review, refer to the commentary "Fitch Completes Traditional Investment Manager Global Peer Review" dated 7 June 2017. Azimut is a Milan-listed investment manager established in 1989. At end-1Q17, it had assets under management (AuM) and custody (AuC) of EUR46.5 billion. KEY RATING DRIVERS IDRS AND SENIOR DEBT Azimut's ratings reflect a well-established domestic franchise and overall solid financial profile. The ratings also reflect Azimut's moderate size compared with peers and a concentrated distribution model, which relies significantly on financial advisers (FAs; around 1,636 at end-1Q17) selling Azimut products to high-net worth individuals, predominately in Italy but increasingly also abroad (20% of AUM at end-1Q17). Azimut competes with other investment managers but also with private banks given its business model. Its business model of primarily distributing in-house products results in solid financial metrics, including strong asset performance and consistently adequate profitability (even if variable fees are excluded). Net asset flows are largely driven by client acquisition of existing FAs and the acquisition of additional FAs. AuM margins are strong relative to peers', also due to its business model, which captures both product fees and distribution fees. Azimut's gross debt/EBITDA of around 1.0x at end-1Q17 (pro forma for a convertible bond repurchase of EUR200 million in May 2017) was sound, but is likely to be volatile due to performance fees. Excluding performance fees, pro forma cash flow leverage was higher at around 1.9x, but Azimut has proven capable of generating reasonable performance fees in all but extremely adverse market conditions. Capital and liquidity are largely fungible across the group since Azimut is no longer subject to consolidated supervision concerning regulatory capital after having transformed all its financial institutions (SIM) into asset management companies (SGRs) and because the number and size of its regulated entities is small. This supports higher double leverage than at more tightly regulated groups. Our assessment of Azimut's company profile has a high influence on the IDRs. Azimut's franchise is well-respected in Italy and has allowed the company to record consistent growth in recent years. However, its franchise relies to a large extent on the performance of its FAs. Consequently, product under-performance or a reputational or operational loss would have a more meaningful negative impact on Azimut's creditworthiness than more diversified or larger investment manager peers. Positively, Azimut's FAs are typically also shareholders, which helps align the company's and the FAs' strategic goals. Azimut operates in around 15 countries but the bulk of its revenues are sourced from Italy (BBB/Stable). We do not believe that Azimut is as exposed to Italy's operating environment as domestic banks are. Azimut's direct credit exposure to Italian counterparties is short-term and in our view, its customer base (high-net-worth individuals largely in the north of Italy) would be little affected by a further deterioration of Italy's fiscal or macroeconomic performance. However, Azimut's ability to issue or refinance debt will likely be linked to broader market perceptions of Italian sovereign and country risk. We deem the company's risk controls to be adequate. However, Azimut relies to a large degree on outsourcing contracts, which are more challenging to manage than internal processes. In addition, its growth plans outside Italy (including expansion in emerging markets with potentially weaker corporate governance) exposes Azimut to additional operational and reputational risks. The senior notes are rated in line with Azimut's Long-Term IDR as Fitch views the probability of default on the notes as the same as the probability of default of Azimut. RATING SENSITIVITIES IDRS AND SENIOR DEBT Rating upside is currently limited given Azimut's modest size, concentrated business model and, to a lesser extent, Italy's challenging operating environment. In the medium- to longer- term, a combination of improving scale and revenue diversification by distribution channel or geography could be rating-positive assuming Azimut's financial metrics, notably leverage, remain at their current levels or improve. Reputational damage to Azimut's franchise that would impair the ability to retain existing or attract new FAs, on whom Azimut relies to generate fee revenue (and attract new AuM) would be rating-negative. A weakening of its negotiating position with its FAs that would result in higher distribution costs could also be rating-negative. A sizeable operational loss, for instance, as a result of internal or external fraud or non-compliance with regulatory requirements or anti-money laundering provisions would be negative for Azimut's ratings. A downgrade of Italy's sovereign rating could affect Azimut's ratings or Outlook if the negative sovereign rating action is driven by deterioration in Italy's macroeconomic environment. Higher cash flow leverage, either as a result of additional debt or declining EBITDA (notably if the decline is due to lower AuM and not primarily due to lower performance fees) would be rating-negative. Sharply higher double leverage as a result of higher-than-expected capital returns could also put pressure on Azimut's ratings. The rating of the senior unsecured notes is primarily sensitive to changes in Azimut's Long-Term IDR. Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Silvana Gandolfo Associate Director +44 20 3530 1301 Committee Chairperson Julie Solar Senior Director +1 312 368 5472 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com. 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