Sept 26 - Fitch Ratings has affirmed Man Group plc’s (Man) Long-term Issuer Default Rating (IDR) at ‘BBB’ and revised the Outlook to Negative from Stable. A full list of rating actions is at the end of this comment.
The affirmation reflects Man’s strong franchise in alternative investment fund management, strong liquidity, moderate gross leverage and credit-positive capital requirements. However, the revision of the Outlook reflects higher downside risks to its credit profile arising from the continuous decline in funds under management (FUM), pressure on earnings and high pay out policy.
FUM have been on a declining trend for some time, reducing to USD53bn at end-H112 driven by net outflows, negative investment performance, the ‘de-gearing effect’ of AHL, Man’s managed futures division, driven by its negative performance on guaranteed products and negative FX movements. While net fund outflows remain partly mitigated by Man’s strong sales ability on the back of a more diverse product suite and can be partly attributed to cyclical factors (e.g. lower investor risk appetite) arresting this trend remains one of Man’s key challenges.
Management fee (220bp/FUM in H112) margins are strong relative to long-only managers and EBITDA margins are still quite healthy. Declining FUM and a shift towards less structured FUM means Man is having to address costs in order to try to offset aggregate level margin pressure and earnings pressure. Performance fees are inevitably volatile but can provide very material upside when triggered.
Man is required to comply with bank-like regulatory capital requirements. This is ratings positive because it means it has to hold net tangible assets (ie there is a secondary source of debt service other than operating cash flow) and restricts the risk of large debt-financed acquisitions. Leverage metrics remain solid (gross debt/EBITDA in H112 stable at around 1.9x under Fitch’s calculations) despite EBITDA reduction, thanks to debt buy backs. Man also has a comfortable liquidity and net cash position, which Fitch expects to continue.
Man has generally reduced its risk appetite for, and levels of, loans to funds and seed capital investments. However, Man remains exposed to contingent credit, liquidity and market risks from such sources and is periodically prepared to make use of its own balance sheet to support funds. For example, in 2011 Man acquired all the residual exposure to the Lehman estates from 29 GLG funds for USD355m.
The most likely reason for a downgrade would be the company failing to arrest the decline in FUM and neutralise EBITDA pressure, especially if this leads to a weakening of gross debt/EBITDA and interest cover beyond current levels. In this regard, the maturing of a further USD172m of senior debt in 2013 helps to cushion the downside risk. Downward pressure could also arise from a material reduction in net cash or increase in gross leverage as a result, for example, of an acquisition. Under Fitch’s criteria, debt/EBITDA is generally less than 3x and interest cover at least 6x for ‘BBB’ rated investment managers.
Evidence of a sustainable easing in FUM and earnings pressures, combined with maintenance or improvement of leverage measures could see the Outlook revised back to Stable.
Man’s subordinated notes are rated one notch below its IDR, reflecting their subordination. Man’s hybrid bond is rated three notches below its IDR, reflecting its deep subordination (two notches) and incremental non-performance risk characteristics (one notch). The ratings are broadly sensitive to the same considerations that might affect Man’s IDR.
The rating actions are as follows:
Long-term IDR: affirmed at ‘BBB’; Outlook revised to Negative from Stable
Senior unsecured debt: affirmed at ‘BBB’
Dated subordinated debt: affirmed at ‘BBB-’
Hybrid debt: affirmed at ‘BB’