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Fitch Affirms Aberdeen Asset Management at 'A'/'F1' on Standard Life Merger Announcement
March 8, 2017 / 1:11 PM / 8 months ago

Fitch Affirms Aberdeen Asset Management at 'A'/'F1' on Standard Life Merger Announcement

(The following statement was released by the rating agency) LONDON, March 08 (Fitch) Fitch Ratings has affirmed Aberdeen Asset Management Plc's (AAM) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A' and 'F1' respectively. The Outlook on the Long-Term IDR is Stable. At the same time, AAM's subordinated perpetual cumulative notes have been affirmed at 'BBB'. This rating action follows an announcement made on 6 March 2017 that boards of AAM and Standard Life plc (Standard Life) have reached an agreement on the terms of an all-share merger between the two companies. Management expects the merger, which is still subject to shareholder, regulatory and anti-trust approvals, to close in 3Q17. The combined group, which will operate under both the AAM and Standard Life names, would create the UK's largest active investment manager with end-2016 pro forma assets under management (AuM) of around GBP581 billion (compared with AAM's GBP303 billion at end-2016). KEY RATING DRIVERS IDRS The affirmation of AAM's IDRs primarily reflects Fitch's view that the improved scale and diversification of the combined group's enlarged franchise will mitigate higher cash flow leverage of the group compared with AAM's current leverage (defined as gross debt/EBITDA) as well as execution and strategic risks related to the planned transaction. The combined group's credit profile will benefit from a materially larger and more diversified franchise in active investment management, with AAM's emerging market and Asia Pacific equity expertise complementing Standard Life's well-established UK equities and multi-asset franchises. The combined group's distribution network will be fairly well-diversified by channel, including long-dated distribution agreements with Lloyds, Phoenix Group (Phoenix Life Limited: Insurer Financial Strength: A/Positive) and Standard Life Group itself. According to management, overlap among the combined group's large clients is limited. Fitch does not expect a major shift in strategy or risk appetite following the merger. Similar to AAM and Standard Life currently, the combined group would be expected to focus on active investment strategies, particularly on absolute return and multi-asset strategies as well as the growing UK pensions and savings market. While Fitch views the anticipated cost savings as realistic (GBP200 million or around 11% of the combined group's cost base), execution risk remains present due to the combined group's governance structure which aims to reconcile AAM's and Standard Life's management teams and investment approaches. Net flows (which have been negative at AAM in recent years largely due to its focus on emerging market assets, which have been out of favour with investors) would improve on a pro forma basis but would likely remain weaker than the asset performance of higher-rated investment manager peers. In addition, it remains to be seen whether the combined group will be able to counter asset flow and fee pressure experienced by active investment managers as a result of increasing investor preference for passively managed funds. Fitch estimates the combined group's EBITDA margin could range between 45% and 50% (depending on the timing of integration costs and cost synergies), which compares well with peers (and is stronger than AAM's EBITDA margin of around 39% in the 12 months to end-3Q16). Fitch estimates that the combined group's gross debt/EBITDA ratio would be around 1.4x, compared with around 0.6x at AAM at end-3Q16, the lower end of Fitch's 'a' category quantitative leverage benchmark for traditional investment managers. This includes all of Standard Life's Tier 2 debt as well as its Tier 1 instrument as we would not assign any equity credit to these notes under Fitch's insurance criteria. Interest coverage (EBITDA/interest expense) would be weaker than currently at AAM but still within Fitch's 'a' category quantitative benchmark range for traditional investment managers. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES AAM's USD500 million perpetual cumulative subordinated instruments receive 50% equity credit and are rated three notches below the company's IDR, in accordance with Fitch's criteria for the "Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis". A hybrid instrument with easily activated going-concern loss absorption is normally rated at least three notches lower than the issuer's Long-Term IDR. AAM's GBP100 million additional Tier 1 notes (5% trigger) issued in 2015 also receive 50% equity credit in line with Fitch's criteria. RATING SENSITIVITIES IDRS AAM's IDRs are primarily sensitive to execution and strategic risks around the planned transaction. These include net outflows for instance due to higher-than-expected client overlap, consultant recommendations or underperformance following alignment of investment approaches, inability to realise anticipated cost synergies and exceeding projected integration expense. In addition, Fitch would likely downgrade the ratings should leverage of the combined group be higher than currently expected, for instance due to lower-than-expected combined EBITDA. Given heightened execution risks and the increased leverage following transaction closing, upside to the ratings is limited in the short- to medium-term. Over time, the ratings could benefit from the combined group's better-balanced revenue profile, improved asset performance and lower leverage. Should the transaction not be consummated, AAM's IDRs would come under pressure given recent negative net flows and the corresponding impact on financial metrics, notably the company's EBITDA margin. In addition, AAM's rating would remain sensitive to sensitivities previously outlined, including increasing staff attrition (including the departure of key investment staff) and inability to attract sufficient volumes of EM-related gross inflows once investor sentiment has recovered. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES AAM's subordinated debt rating is broadly sensitive to the same considerations that might affect the company's IDR. The securities' rating is also sensitive to a change in Fitch's assessment of the probability of their non-performance relative to the risk captured in AAM's IDR. Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnau Autonell Associate Director +44 20 3530 1712 Committee Chairperson Nathan Flanders Managing Director +1 212 908 0827 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here Insurance Rating Methodology (pub. 15 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020211 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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