DBRS: Aberdeen Asset Management’s Ratings Unaffected at BBB (high)-After Acquisition Announcement

DBRS has today commented that the ratings of Aberdeen Asset Management PLC (Aberdeen or the Company), including its Issuer and Senior Unsecured Debt ratings of BBB (high) are unaffected by the Company’s announcement that it will acquire certain parts of the RBS Asset Management business. Concurrently, Aberdeen released its Interim Management Statement (IMS) for the quarter ending 31 December 2009, indicating a solid start to the Company’s 2010 fiscal year. The trend on all ratings remains Negative.

Today’s comment follows Aberdeen’s announcement that it had entered into a definitive agreement with Royal Bank of Scotland plc (RBS) to acquire certain fund management assets and contracts of RBS’ Asset Management business. In return for consideration of approximately GBP 84.7 million in cash, Aberdeen will acquire assets under management (AuM) of GBP 13.5 billion at 30 September 2009, with associated revenues of circa GBP 22 million. As of 31 December 2009, Aberdeen had GBP 144.1 billion of AuM and total revenues of GBP 421.9 million for its fiscal year ending 30 September 2009.

DBRS views the acquisition as a long-term positive for Aberdeen as it will provide the Company with additional product capabilities. The targeted businesses include a proven long-only multi-manager business and a fund of hedge funds business, which are products absent from the Company’s broad range of capabilities. Additionally, Aberdeen expects the transaction to be accretive to earnings upon closing. Furthermore, Aberdeen gains additional diversification of its client base and expands its distribution network through a long-term agreement providing access to RBS Wealth Management, principally Coutts & Co. Importantly, this proposed transaction is expected to be funded by the placing of new ordinary shares, as such, debt will not increase as a result of this transaction.

DBRS notes however, that there are short-term risks involved, as is the case with any acquisition. These risks include the retention of key personnel, the retention of key customers and the prevention of any significant attrition of the acquired AuM. Given the track record of Aberdeen’s management in integrating previous acquisitions, DBRS believes that these risks will be well managed.

Concurrent with the announcement of the acquisition Aberdeen released its IMS for the quarter ending 31 December 2009, indicating good performance. The IMS indicated that AuM are stabilising, as the pace of net outflows moderated to GBP 2.6 billion in the quarter compared to net outflows of GBP 4.3 billion for the comparable period a year ago. Improving global equity markets resulted in strong net inflows into higher margin equity funds of GBP 3.4 billion, while fixed income and money market funds experienced net outflows of GBP 3.4 billion and GBP 2.9 billion, respectively. Importantly, Aberdeen was awarded GBP 3.1 billion of mandates but not funded at 31 December 2009, and new business won in the quarter totalled GBP 9.6 billion. Given Aberdeen’s scale and depth of products, DBRS views the Company as well-positioned to capitalise on a continued recovery in global markets. Going forward, DBRS expects Aberdeen to fully leverage its increased scale and depth resulting from the transaction to increase AuM, revenues and overall profitability

Gearing has improved with net gearing declining to 11.6% at 31 December 2009, compared to 17.2% at 30 September 2009. Sustained low gearing is vital to ratings stabilization. Moreover, accounting for the RBS acquisition, Aberdeen’s net gearing ratio will decline to 10.8% on a pro forma basis. Further, DBRS views the issuance of GBP 90 million of convertible notes in the prior quarter positively as proceeds were used to retire bank debt, thereby extending the maturity profile of Aberdeen’s funding and increasing financial flexibility.

DBRS maintains a Negative trend on the ratings reflecting DBRS’s concern that profitability will remain under pressure as demand for asset management continues to be weak resulting from reduced household income and diminished investor risk appetite. While AuM flows have improved since the early part of 2009, redemptions could increase should global markets return to the distressed environment recently experienced. The Negative trend also reflects the integration and execution risks from the RBS acquisition. As discussed above, asset and key personnel retention is vital to the long-term success of this transaction. Ratings could be pressured by noteworthy attrition of AuM or key personal or should the anticipated benefits from the acquisition not materialise.

The current rating reflects DBRS’s expectation that the Company will continue to maintain low net gearing levels. Furthermore, while DBRS’s ratings provide for the likelihood of negative earnings pressure through the economic cycle, any prolonged period of reduced earnings evidencing damage to the franchise would have negative ratings consequences.

Notes:
All figures are in GBP unless otherwise noted.

The applicable methodology, Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our web site under Methodologies.

This is a Corporate (Financial Institutions) rating.