OREANDA-NEWS. Fitch Ratings has affirmed FMR LLC's (Fidelity) Long-Term Issuer Default Rating (IDR) and unsecured debt rating at 'A+'. The Rating Outlook is Stable.

These rating actions have been undertaken as part of Fitch's global peer review of traditional investment managers. For more information on the peer review, please refer to the press release entitled, 'Fitch Completes Traditional Investment Manager Global Peer Review' dated June 9, 2016.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

Fidelity's ratings reflect its leading franchises in the asset management and distribution businesses, strong investment performance through a variety of market cycles, diverse business model, which yields more stable earnings performance over time, limited balance sheet risk, predominantly unsecured funding profile, strong liquidity, manageable and flexible payout ratio, sound risk management infrastructure, and experienced management team. The ratings also reflect Fidelity's potential earnings benefits from rising interest rates related to current money market fee waivers and depressed spread income on brokerage balances.

Rating constraints include higher-than-peer cash flow leverage (debt/EBITDA) ratios, the absence of an articulated leverage target, the sensitivity of the business model to changes in market conditions and investor appetite for actively managed investment products, relatively low operating margins (due, in part, to a higher-cost capital structure but also active reinvestment in the business), and modest key man risk associated with the involvement of the Johnson family. The modest exposure to non-financial businesses is also viewed as a relative weakness, given the potential drag on operating earnings and reputational risk, and the impact on overall organizational complexity.

Fitch believes Fidelity has an extremely strong market position and its product diversity has allowed the firm to weather economic cycles, market volatility, and investor trends, including recent growth in passively managed strategies, with no material impact to the firm's overall credit profile. Fitch believes the firm will continue to develop new products and strategies to respond to market trends and generational changes in the customer base in an effort to maintain its strong market share.

At March 31, 2016, the firm had nearly $5.2 trillion in assets under administration (AUA) including $2 trillion of assets under management (AUM), reflecting compound annual growth of 7.5% and 5.2% over the last 10 years, respectively. Fidelity is primarily an active-oriented investment manager, with approximately 88% of its AUM in actively managed investment strategies as of year-end 2015. While marketwide inflows into actively managed strategies have been challenged in recent years, Fidelity's market position in the distribution of both active and passive products has allowed the firm the ability to generate growth in AUA and earnings. Increased investor appetite for passive investments remains a long-term challenge, although Fitch believes there will remain material demand for active investment products; particularly those which are able to outperform net of fees.

Operating performance remained solid in 2015 despite the impact of the low interest rate environment on brokerage spread income and money market fee waivers. Fitch believes the rate hike in late 2015 will benefit 2016 earnings, with reduced fee waivers and higher spread income, while recent market volatility will help trading volume. However, the spin-off of subsidiary, Fidelity Canada Investors, LLC, at year-end 2015, will be a potential offset, as the entity's earnings will no longer be consolidated.

Fidelity has lower EBITDA margins than the traditional investment manager peer group, amounting to 20.3% in 2015. The lower margins are impacted by higher compensation expenses, due to accounting requirements for share-based compensation arrangements, and higher operating expenses, as Fidelity continues to invest in the business. However, Fitch believes Fidelity's private ownership structure has allowed the firm greater flexibility when it comes to investing in new products, services, and infrastructure, regardless of the market environment, as it is not pressured to meet quarterly return expectations from public shareholders and analysts. The ownership structure may also offer Fidelity the flexibility to make opportunistic acquisitions/investments during periods of market dislocation.

In assessing Fidelity's debt obligations, Fitch affords the subordinated and junior subordinated notes (that are maturing beyond five years) 50% equity credit given Fidelity's ability to defer interest payments, the effective maturity of greater than five years, limited covenants, and the absence of non-standard events of default. The subordinated notes are all held by owners and employees of the firm.

Under this construct, Fitch calculates the firm's leverage (debt/EBITDA) to be 1.55x on a TTM basis through Dec. 31, 2015. This leverage profile is slightly above Fitch's general tolerance level for 'A' category traditional investment management firms of 1.5x, but it is meaningfully above the 'A' category average.

Fitch does consider the fact that 100% of the subordinated debt is held by owners and employees of the firm, which aligns their interests with the equity holders and reduces the potential for execution of any acceleration claims. On a senior debt basis, Fitch calculates leverage to be 0.90x on a TTM basis at Dec. 31, 2015, which is modest, but still above the peer group. Additionally, the firm does not have a stated leverage target and senior leverage has been as high as 1.46x within the last five years. Fitch would view a more explicit commitment to a leverage target or range favorably.

Fidelity's senior unsecured debt rating is equalized with the IDR, reflecting the largely unsecured funding profile and available unencumbered asset coverage to the unsecured debt.

Fitch believes Fidelity has a very strong liquidity profile, consisting largely of highly liquid investments. This is significant when compared to modest near-term debt maturities and the size of the firm's core balance sheet, and compares favorably to peers. Shareholder distributions are not outsized, in Fitch's opinion.

Seed capital investments as of March 31, 2016 accounted for about 8.5% of tangible capital. This is below the traditional investment manager peer group average and does not pose meaningful balance sheet risk. Fitch does not expect seed capital commitments to change materially, given the already significant size and diversity of the firm's AUM.

Fidelity has some investments in non-financial businesses, such as the majority-owned telecommunications company, Colt Group S. A., in addition to co-investments in companies in other industries with its Investor Entities (shareholders and employees) managed by the firm's Devonshire unit. The debt obligations of these investments are non-recourse to Fidelity, but Fitch believes the investments pose potential reputational risk to the firm, in addition to a potential drag on earnings performance.

The Stable Outlook reflects Fitch's expectation that Fidelity will maintain its strong market position, by generating strong investment returns and responding to market and investor trends with new products and services, and continue to generate consistent earnings performance, strong liquidity, and a relatively stable leverage profile.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT

Positive rating momentum could develop over time as a result of a sustained decline in leverage, a more explicit commitment to a leverage target, and an improvement in operating margins, which could provide the firm with more earnings flexibility during market cycles. Positive rating actions could also result from further evidence that the recent shift of investor capital into passively managed strategies is more cyclical than secular, as increased inflows into actively managed strategies would be expected to benefit Fidelity. Additional revenue diversification away from the asset management business and towards the distribution businesses could also contribute to positive rating momentum.

Negative rating momentum could develop from declines in investment performance or other reputational damage which lead to material outflows, thus impacting the firm's earnings, leverage, and liquidity position. Adverse regulatory scrutiny of Fidelity or the asset management business more broadly, or a material increase in balance sheet commitments to non-financial businesses could also be viewed negatively. Reputational damage associated with, or the voluntary extension of financial support to Investor Entities could also pressure ratings.

Fitch has affirmed the following:

FMR LLC

--Long-Term IDR at 'A+';

--Unsecured Debt at 'A+'.

The Rating Outlook is Stable.