DBRS revises Trend on Aberdeen’s BBB high to Positive, due to strong performance and SWIP acquisition

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Aberdeen Asset Management plc (“Aberdeen” or the Group) including its BBB (high) Issuer and Senior debt ratings. The Trend on all ratings has been revised to Positive from Stable. This rating action follows the announcement by Aberdeen on November 18 of its fiscal year 2013 (FY13) results and the agreement to acquire Scottish Widows Investment Partnership (SWIP) from Lloyds Banking Group (Lloyds), subject to regulatory approvals.

In revising the Trend to Positive, DBRS has taken into account both the positive momentum in Aberdeen’s current business as well as the potential benefits from the SWIP acquisition. As part of the deal, Aberdeen and Lloyds have entered into a long-term strategic relationship and the GBP 550 million acquisition cost is being funded through the issuance of shares to Lloyds. This will result in Lloyds owning approximately 9.9% of the enlarged Group (with the shareholding subject to a 3 year phased lock-up). In addition, there is a 5-year earn out of up to GBP 100 million, subject to certain deliverables.

DBRS considers that Aberdeen’s FY13 results demonstrate continuance of the steady positive trend in financial performance of the last few years. Aberdeen has built on its core strengths in Active Equities and Emerging markets to grow Assets under Management (AuM) to GBP 200 billion, whilst increasing fee levels (the blended average management fee was 50 basis points (bp) in FY13, up from 45 bp in FY12), and improving operating profit margins (45.4% in FY13, up from 40.6% in FY12). Moreover, Aberdeen continues to maintain a balance sheet with minimal debt outstanding. DBRS views the all-share acquisition of SWIP, which has AuM of GBP 136 billion) as a long-term positive for Aberdeen, as it will improve the diversification of the enlarged Group because the assets are more UK-oriented and weighted towards Quantitative Equities and Fixed Income. Further, through the strategic partnership, Aberdeen hopes to improve its presence in the UK retail market by benefiting from Lloyds’ large distribution network.

However, the acquisition will also bring a number of challenges. The business mix of SWIP, which is more weighted towards lower margin passive funds, results in lower fee levels than Aberdeen’s overall business. As such, the blended fee of the enlarged Group is expected to drop to around 30 bp. DBRS notes that the acquisition involves execution risk, particularly as SWIP is large relative to Aberdeen’s current size. Aberdeen has built up experience in integrating acquisitions from the transactions it has undertaken over the past few years, but none of them were of the same scale as SWIP. In addition, DBRS is also cautious as to how quickly any benefits will accrue from the strategic relationship with Lloyds.

DBRS will closely monitor the progress made by Aberdeen over the next 6 – 12 months. If the acquisition progresses in line with plans, then there could be further upward pressure on the rating. Conversely, if the acquisition faces more difficulties in implementation than expected, it could result in the Trend reverting back to Stable.

Notes:
All figures are in British Pound Sterling (GBP) unless otherwise noted.

The principal methodology applicable is: Rating Asset Management Companies and DBRS Criteria – Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on 30 July 2014, to reflect actual methodologies used]

The sources of information used for this rating include company reports and SNL Financials. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 1 May 2007
Most Recent Rating Update: 9 May 2012

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