Moody’s Investors Service has downgraded its outlook for global asset managers from stable to negative as a result of the “broad and growing scope of economic and market upheavals unleashed by the coronavirus pandemic.”
That upheaval, including a drop of more than 30% in major stock markets before Tuesday’s 9% bounce-back, as well as declines in corporate bonds, “will strain revenues and cash flows” of asset managers as well as their earnings, according to Moody’s.
Asset managers with high concentrations of equity assets and with leverage are most at risk for a downgrade, and firms with current low ratings tend to have more leverage. Among the latter firms are Edelman Financial Engines, rated B2 by Moody’s (equivalent to B rating by S&P), and Focus Financial Partners (Ba3, equivalent to BB-).
Firms with the highest current ratings include BlackRock (Aa3, equivalent to AA-) and Fidelity (A1, or A+).
Asset managers are suffering from outflows as a result of excessive market volatility fueled by the coronavirus pandemic, which has closed down all but essential activity in whole countries, cities and states.
According to Bank of America’s fund flow report for the week ended March 18, $108.9 billion left bond funds, including record withdrawals from investment-grade, TIPS, mortgage-backed and municipal bond funds.
Equity funds saw far fewer withdrawals, just $20.7 billion, because investors apparently chose to “sell the best and keep the rest,” unloading bond funds that had performed relatively better than stocks to pocket smaller losses.
“Our previous stable outlook was premised on manageable debt burdens, investor appetite for higher risk and higher fee products, along with continued but only slowing global economic growth. Those assumptions are no longer tenable in light of the coronavirus pandemic,” according to the Moody’s report.
“Now we see a very sudden change in the market … With reduced valuations of assets — equity, fixed income and alternatives — and a lot more uncertainty, there will be pressure on earnings and revenues,” Senior Analyst Dean Ungar told Thinkadvisor.
Moodys hasn’t yet downgraded the ratings on most of the individual asset managers whose debt it rates for credit quality. Of its 34 asset manager ratings, only one has been downgraded recently — Tortoise Borrower — whose assets under management are concentrated in the midstream energy sector, which has suffered a “sharp decline,” according to Moody’s. It downgraded Tortoise’s family corporate rating and secured term loan rating (due 2025) from Ba2 to Ba3.
Moody’s is now in the process of reviewing the credit rating of the other asset managers it rates and expects changes will be forthcoming over next few weeks, Ungar said. The review will look critically at the impact of market volatility on earnings and revenues, looking ahead 12-18 months.
The agency’s ratings for most asset managers is currently stable except for Virtus Investment Partners, which is positive, and Legg Mason, which is under review for an upgrade following the announcement of its acquisition by Franklin Resources. Of the 34 asset managers Moody’s rates, 19 have debt rated investment grade; 15 have debt rated as high yield.
— Check out Can Legg Mason Deal Bring Franklin Back to Its ‘Glory Days’? on ThinkAdvisor.