OREANDA-NEWS. Fitch Ratings has upgraded Man Strategic Holdings Ltd's Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB'. The Outlook on the Long-term IDR is Stable. Man Group Plc's Tier 2 subordinated debt has also been upgraded to 'BBB' from 'BBB-'.

Man Strategic Holdings Ltd (Man) is a subsidiary of Man Group plc (Man Group), a London-based investment manager.

The actions have been taken by Fitch in conjunction with a broader traditional investment manager industry review. For more commentary on the broader sector review, see 'Fitch Completes Traditional Investment Manager Review; Upgrades AMG and Man; Revises Invesco to Positive', also published today and available at 'www.fitchratings.com'.

The upgrade primarily reflects Man's improved leverage following significant debt repayments, greater business diversification as a result of scaling up its equity products offering, a somewhat more balanced earnings profile and a stabilisation of Man Group's funds under management (FuM) following several years of net outflows.

However, Man's earnings base and cash flow leverage remain more vulnerable than those of its higher-rated traditional investment manager peers due to its comparatively more concentrated product offering and higher share of performance fees in its revenue stream. The Stable Outlook reflects our expectation that absent any major market dislocation, Man Group will continue to generate adequate core earnings and maintain leverage broadly at current levels.

KEY RATING DRIVERS

LONG-TERM IDR
The Long-term IDR reflects Man Group's low cash flow and balance sheet leverage, adequate profitability, strong cost management, a sound balance sheet resulting in moderate credit, market and liquidity risks as well as its sound franchise in alternative investment fund and improving franchise in traditional investment management.

Given above-average volatility in Man's EBITDA, reduced leverage (gross debt/trailing 12 months EBITDA: 0.3x; net debt/TTM EBITDA: -1.2x) is well within Fitch's tolerance range for the rating level and is a key driver of the Long-term IDR.

In addition, Man's strong execution of its 2013 cost-saving programme ahead of time underlines the group's flexible cost base. This is important given continued pressure on Man's blended margin as a result of a lower proportion of higher-margin products (such as guaranteed products) and a shift to more institutional lower-margin clients (see also 'Fitch: Man's 2014 Results Benefit from Diversification and Cost Cuts', 25 February 2014).

Management fee margins are strong relative to long-only managers and we expect EBITDA margins to remain healthy in the absence of material market value declines or outflows. After acceptable levels of net inflows in 2014, Man reported modest net outflows in 1Q15 (minus USD1.3bn). Reversing this trend by ensuring consistently adequate asset performance across its product range is in our view a key challenge for management.

Despite various cash-funded acquisitions since 2014, notably of Numeric in mid-2014, surplus liquidity and surplus regulatory capital remained adequate for Man's rating at end-2014.

SUBORDINATED DEBT
Man Group's USD150m fixed-rate reset callable dated subordinated notes guaranteed by Man have been upgraded to 'BBB' from 'BBB-', following the upgrade of Man's Long-term IDR.

The notes, irrevocably guaranteed on a subordinated basis by Man, are subordinated and qualify as Tier 2 regulatory capital. They are rated one notch below Man's Long-term IDR in line with Fitch's applicable criteria.

The one notch reflects the notes' loss severity due to the subordinated nature of the notes. As the notes do not contain any coupon deferral features, no notches for incremental non-performance risk (relative to senior obligations) have been applied. The notes are callable but do not contain any step-up language.

RATING SENSITIVITIES

LONG-TERM IDR
Following the upgrade, upside potential for Man's Long-term IDR is limited in the medium-term. Man's rating will likely remain in the 'BBB' range, given the group's current size and business model with higher-than-average exposure to volatile products and reliance on performance fees.

Downward pressure could arise from sustained underperformance in one or several of its business lines leading to net outflows and weakened profitability. The ratings may also be downgraded on materially higher gross leverage, for instance, as a result of a debt-funded sizeable acquisition; a material reduction in Man's net cash position or from failing to compensate for sustained pressure on its management fee margin.

While we believe that further potentially sizeable acquisitions are likely, we expect these acquisitions - as with past acquisitions - to be funded with surplus capital, as previously indicated by management.

SUBORDINATED DEBT
As Man Group's subordinated notes are notched down from Man's Long-term IDR, they are primarily sensitive to a change in Man's Long-term IDR. Fitch does not rate Man Group. Although double leverage at the holding company, Man Group, could rise (115% at end-2014), we expect it to remain within acceptable tolerance levels (120% as per applicable criteria).

The notes' ratings are also sensitive to changes in their notching, which could arise if Fitch changes its assessment of loss severity of the notes or of the risk of their non-performance relative to the risk captured in Man's Long-term IDR.