Santander Asset Management #BB/B# Ratings Remain On Watch Positive Pending Completion Of Santander Share Buyback

Stocks and Financial Services Press Releases Friday July 14, 2017 16:59
LONDON--14 Jul--S&P Global Ratings

LONDON (S&P Global Ratings) July 14, 2017--S&P Global Ratings Services today said it has maintained its CreditWatch positive placement on its 'BB/B' long- and short-term counterparty credit ratings on Jersey-based Santander Asset Management Holdings Ltd. (SAM).

We also maintained the CreditWatch positive placement on our 'BB' issue ratings on the company's senior secured debt. On Nov. 16, 2016, Banco Santander announced its intention to buy back the 50% of SAM that it sold to two private equity investors, Warburg Pincus and General Atlantic, in 2013. Santander, Warburg Pincus, and General Atlantic also agreed to work toward a disposal of their participation in Allfunds Bank S.A. We note that this transaction is subject to the customary regulatory approvals and is likely to be completed toward the end of 2017.

We consider the share buybacks as positive for SAM's credit profile because integration within a higher-rated banking group indicates a higher likelihood of SAM receiving financial support if it faced financial difficulty. Currently, we view SAM as nonstrategic to Santander and therefore do not factor any notches of group support into our ratings.

Our assessment of SAM's group status was based on Santander's lack of a controlling interest in SAM under the current structure. We therefore considered SAM unlikely to receive support from Santander.

In our view, Santander's decision to buy back the shares in SAM signals that it views the asset management business as being of increased strategic importance to the group. In particular, it offers the prospect of increasing stable and recurring fee income in the current low interest rate environment for banks.

The CreditWatch placement reflects our view that we could revise our group status assessment of SAM to at least moderately strategic from nonstrategic after the transaction closes, as we consider the likelihood of support to be much more credible from a parent with 100%-equity ownership. We could also see other positive effects on SAM's stand-alone credit profile in the longer term, given that we do not expect it will need to operate with such high leverage.

This could entail an upgrade of up to four or five notches upon completion of the Allfunds Bank sale and the share buyback by Santander.

This would reflect potential group support from its 100% owner Santander and an improved financial risk assessment given the likely removal of our financial sponsor cap and potential reduction in outstanding debt. SAM consolidates the asset management subsidiaries of Banco Santander S.A. into a separate entity.

The 'BB' issuer credit rating on the company is based on the 'bb' group credit profile (GCP) of the operating entities that comprise the SAM group.

We equalize the ratings on the company with the GCP of SAM (that is, we do not notch down for structural subordination) given our view that there are no material barriers to cash flows from the operating entities to the company. We do not factor any notches of uplift for potential extraordinary support from Banco Santander into the ratings given our view that SAM is a nonstrategic subsidiary.

Instead, we incorporate the ongoing benefits of SAM's association with Banco Santander in the GCP. SAM is a Europe and Latin America-focused asset manager operating in 10 countries with over 600 employees.

Its total assets under management (AUM) as of March 31, 2017 was €181.4 billion (broadly unchanged from €180.6 billion as of year-end 2016 and up from €158.8 billion as of year-end 2015), making it a midsize manager in global terms. In terms of business mix, SAM has a bias toward retail clients, fixed income products (including pensions), and money market products. As of Dec. 31, 2016, Brazil (34% of AUM) and Iberia (Spain and Portugal; 40% of AUM) were SAM's two largest markets in terms of share of AUM and profits.

The U.K. is the third most important market for SAM with a broadly diversified product offering. AUM in the U.K. business amounted to €21.2 billion at end-2015. SAM also has a meaningful presence in Mexico, where it is the third-largest asset manager by market share, and a smaller presence in Argentina, Chile, and Puerto Rico.

Our view of SAM's satisfactory business risk is based on: SAM's competitive market positions in its core Latin American and Iberian markets, common brand with Banco Santander, and sizable AUM base spread across primarily low risk products.

SAM's track record of fund inflows is also a supportive factor. SAM's strategy to continue to leverage Banco Santander's extensive branch network in its core markets to drive business volume growth. We understand this is a symbiotic relationship as the distribution agreement with the bank is an important pillar of this strategy and Banco Santander views SAM's investment platform as an integral part of its retail client offering.

Overall, we view SAM's long-term captive distribution agreement with Banco Santander as a supportive factor for our assessment of the group's business stability.

We view SAM's investment performance as neutral to the ratings. While overall investment performance is satisfactory and generally in the second quartile or above, there is variance by country and asset class.In terms of profitability, we expect SAM to operate in the 20%-35% EBITDA margin band, which we consider to be average compared to peers.Our view of SAM's aggressive financial risk profile reflects its 50% ownership by two private equity firms.

We calculate 2016 gross debt to adjusted EBITA at 3.3x and EBITDA coverage of gross interest expense at 6.1x. These metrics have improved from previous years driven by higher EBITDA based on higher net commission income and higher dividends from Allfunds Bank. We believe SAM has strong liquidity based on its likely sources and uses of cash over the next 12-18 months.

The existing €985 million senior secured term loan matures in 2020 and we view the absence of any near-term refinancing risk as supportive of the ratings. We expect that SAM will maintain satisfactory levels of liquidity beyond what is needed for regulatory requirements at operating subsidiaries. SAM reported cash and short-term bank deposits of €329 million at end-2016 (€310 million at end-2015).

In addition, there is a $200 million senior secured revolving credit facility (RCF) for further liquidity support. CREDITWATCH We intend to resolve the CreditWatch placement upon the signing of final terms and receipt of regulatory approvals for the transaction.

When we resolve the CreditWatch placement, we could raise the ratings by up to four or five notches to reflect our expectation of SAM's greater strategic importance within the Santander group, as well as likely improvements in its leverage profile following the completion of the transaction.

We could affirm the ratings if the transaction does not proceed.

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