(Repeat for additional subscribers)
April 8 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Aberdeen Asset Management Plc's (AAM) Long-term Issuer Default Rating (IDR) to 'A' from 'A-' and Short-term IDR to 'F1' from 'F2' following AAM's acquisition of Scottish Widows Investment Partnership Group Limited (SWIP). The Outlook on the Long-term IDR is Stable.
The upgrade recognises the improved product and geographical diversification that the SWIP acquisition brings to AAM. This supports AAM's otherwise favourable financial metrics for an entity rated in the 'A'-range, notably its strong profitability and low levels of gearing and debt. AAM's franchise and earnings potential is supported by improved distribution capability as a result of a long-term strategic relationship with Lloyds Banking Group Plc (A/Negative/a-), which became a 9.9% shareholder of AAM in consideration for the sale of SWIP.
KEY RATING DRIVERS - IDRs
AAM's IDRs reflect its profile and track record as a traditional asset manager. The ratings benefit from the high cash generation typical of AAM's industry but are also exposed to the risks common to its peer group, notably the sensitivity of assets under management (AUM), and consequently earnings, to market dynamics, and operational and reputational risks. AUM was up by 7.1% to GBP200bn at the financial year ended 30 September 2013 but had reduced to GBP187bn by end-February 2014 due to continuing weaknesses in emerging markets. Management's pro-forma balance sheet of the new combined AAM/SWIP business shows that AUM would have increased by about 74% at end-February as a result of the acquisition.
AAM has grown into its present global position via successfully integrated acquisitions, which have contributed to higher earnings and increased geographic and product diversification. AAM's ratings consider the increased portfolio diversification arising from the SWIP acquisition, particularly from the addition of a GBP55.7bn quantitative equities and GBP39bn fixed income portfolio. Furthermore, SWIP's strong UK and developed market focus mitigates AAM's previous concentrations to emerging markets and Asia Pacific.
The ratings also consider the integration challenges, margin pressures and potential reduction of existing AUM in light of the comparatively large SWIP acquisition. Fitch considers that cost savings from the elimination of duplicated activities will contribute to improving financial performance although this will be offset by integration costs during FY14 and FY15. Operating and fee margins are tighter in the acquired business, which will weaken the combined group's margin and efficiency metrics in the short to medium term.
RATING SENSITIVITIES - IDRs
AAM's IDRs would benefit from successful execution of the integration process, and could be sensitive to AUM levels and balance sheet discipline. They could be upgraded if AAM's AUM continues to increase and/or there were further improvements in client, product and geographical concentrations combined with an improving net cash balance and earnings with consistently low levels of leverage.
The ratings could be downgraded if there is a substantial and sustained increase in leverage, material reputational damage, a sustained deterioration of fund performance or significant AUM net outflows.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
AAM's USD500m perpetual cumulative subordinated instruments receive 50% equity credit and are rated three notches below AAM's IDR in accordance with Fitch's criteria for the "Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis" dated 23 December 2013. A hybrid instrument with easily activated going-concern loss absorption would normally be rated at least three notches lower than the issuer's Long-term IDR.
The rating actions are as follows:
Long-Term IDR upgraded to 'A' from 'A-'; Outlook Stable
Short-Term IDR upgraded to 'F1' from 'F2'
Subordinated Perpetual Cumulative Notes upgraded to 'BBB' from 'BBB-'