UPDATE 2-Hedge fund firm Man Group shares surge on debt buyback

Fri May 3, 2013 10:29am EDT

* To use up to $470 mln to buy back debt

* Move will save up to $78 mln a year in interest, coupons

* Less shareholder hostility at AGM

* Clients withdrew a net $3.7 bln in Q1

* Company still has fundamental problems-analyst (Updates with AGM results, analyst comments)

By Laurence Fletcher

LONDON, May 3 (Reuters) - Hedge fund firm Man Group cheered investors with plans to use surplus cash to buy back all its debt securities, overshadowing a surge in client outflows to the highest level since the onset of the credit crisis.

Man, which recently unlocked $550 million in capital when its regulatory status was changed, will use up to $470 million of cash to buy back the debt, saving up to $78 million a year in interest and coupons from next year, it said on Friday.

At 1329 GMT Man's shares were up 11.8 percent. They are down by around 60 percent since the start of 2011 on the back of client outflows and poor fund performance.

The former FTSE 100 firm, whose new-look management faced less hostility at Friday's annual general meeting (AGM) than a year ago, said clients withdrew a net $3.7 billion during the first quarter, slightly better than analysts had forecast.

"Whilst these savings (from the buyback) are clearly beneficial to earnings in the short term, they do nothing to address fundamental top line problems caused by poor performance, weak flows and margin pressures," said Numis analyst David McCann, who has a sell rating on the shares.

Man said open-ended funds in computer-driven flagship fund AHL are around 4.5 percent away from the so-called 'high-water mark', the point above which the firm can earn lucrative performance fees.

In spite of a stronger recent performance from the $14.1 billion AHL fund - which has gained 10.4 percent so far this year thanks to the re-emergence of the market trends from which it can profit - Man's assets fell to $54.8 billion from $57 billion in December.

Other funds are performing well too. Evolution - a computer fund that trades emerging markets and which contributes to AHL's performance - is up more than 11 percent in April.

Meanwhile GLG Japan Core Alpha fund gained 24 percent in the first quarter, as Japan's stock market rallied sharply on hopes its aggressive economic policies would kick-start the economy.

"The debt tender programme and performance fee generation ... may indicate signs of stabilization in the business," said RBC Capital Markets analyst Peter Lenardos in a note.

AGM

Shareholders at last year's AGM criticised the nearly $7 million pay package of then-CEO Peter Clarke.

New CEO Manny Roman, appointed in February to turn around the fortunes of the company, has made a raft of changes, including capping bonuses and appointing Sandy Rattray as head of AHL.

Only 7 percent of shareholders failed to back Man's remuneration report, compared with 15 percent a year ago.

But one small shareholder questioned whether Man may have to take a further goodwill writedown on its $1.6 billion acquisition of GLG in 2010, in addition to the $837 million already written down, because the valuation still assumes GLG's assets will grow by a compound annual rate of 8.5 percent.

"Is (Finance Director) Mr (Jonathan) Sorrell a genius for having bamboozled the auditors ... or has he made a tremendous error of judgment not taking the maximum write-off in one go?" the shareholder said.

Man's outflows - the latest in a series stretching over seven quarters - were predominantly driven by the loss of three large, low-margin mandates, Roman said on Friday.

"Business conditions remain challenging for Man," he said. "We remain cautious in our outlook as we will need a more sustained period of performance, particularly from AHL, before we see an improvement in net flows." (Editing by Mark Potter and David Cowell)