S&P: Santander Asset Management Outlook Revised To Stable On More Predictable Credit Profile; 'BB/B' Ratings Affirmed
The outlook revision to stable from negative reflects our view that SAM's recent stable operating performance in terms of net asset flows and profitability, and the return to business-as-usual following the terminated merger process with Pioneer, support our assessment of SAM's business stability and financial risk profile.
On July 27, 2016, UniCredit SpA and Banco Santander S. A. announced their agreement to terminate the merger process between SAM and Pioneer, which had been initiated in November 2015. The merger was envisaged to create one of the top 10 European asset managers, with over €390 billion in assets under management (AUM) and a broad diversity of products, geographies, and customer segments.
Although the merger process consumed considerable resources and management time, evidence of stable operating performance at SAM during that period alleviates our concern that the prolonged merger process may adversely affect SAM's core franchise. Furthermore, in our view, the terminated agreement supports our existing view of SAM's franchise and business stability as we considered the operational integration stemming from a complex and prolonged merger process with Pioneer as inherently risky and believe that it could have had negative consequences for net sales and market shares. We also consider that SAM's steady state leverage is now more predictable and expect the company's debt to EBITDA to remain within the current 3.5x-4.5x level over the next 12 months, although the company's financial risk profile is capped at aggressive due to its financial sponsor ownership.
While not our base-case expectation in the next 12 months, we believe that the terminated agreement to merge with Pioneer is not the end of the road for future strategic changes at SAM. As such, we do not rule out the possibility of transformative changes such as changes in SAM's ownership structure or financial profile beyond our rating horizon.
SAM's 'bb' stand-alone credit profile reflects our view of its competitive market positions in its core Latin American and Iberian markets, its 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 is to continue to leverage Banco Santander's extensive branch network in its core markets to drive business volume growth and 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. This assessment is balanced with our assessment of SAM's financial risk profile as aggressive, which reflects its financial sponsor ownership and our expectation that the company is likely to sustain total gross debt to adjusted EBITDA around 3.5x-4.5x over the next 12 months.
Despite its joint private equity ownership, we consider that SAM has built a track record of liquidity management such that we believe it could withstand substantially adverse market circumstances over the next 24 months while maintaining sufficient liquidity to service its obligations. SAM's senior secured borrowings mature in 2020 and we view the absence of any near-term refinancing risk as supportive of the ratings. We have therefore revised our assessment of SAM's liquidity to strong from adequate.
The 'BB' issuer credit rating on SAM 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 that 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 non-strategic subsidiary. Instead, we incorporate the ongoing benefits of SAM's association with Banco Santander in the GCP.
The stable outlook on SAM reflects our view that its business stability and leverage metrics will remain commensurate with its current rating level over the next 12 months.
We could lower the ratings on SAM if we observed that its client franchise has weakened. This could manifest itself through declines in market share in key markets, in particular a persistent decline in AUM and net inflows, which could negatively affect our view of SAM's business stability. Although not our base case, we could also lower the ratings if we expected sustainably higher leverage, as measured by debt to EBITDA at the consolidated group level, of above 5x, which would point to a highly leveraged assessment from aggressive currently.
An upgrade is unlikely because we consider that SAM's joint private equity ownership will remain unchanged in the next 12 months, which constrains our assessment of SAM's financial risk profile as aggressive.