Legg Mason Inc. Outlook Revised To Positive On Projected Lower Leverage; Ratings Affirmed At 'BBB'


  • We anticipate that Legg Mason will repay its $250 million in unsecured debentures due in July 2019
  • Lower debt levels combined with projected steady cash flow generation are expected to push leverage close to or below 2.0x, our upside trigger at the current rating level.
  • We are revising our outlook on Legg Mason to positive from stable and affirming our 'BBB' issuer credit rating and unsecured debt ratings and our 'BB+' ratings on the company's junior subordinated notes.
  • The positive outlook reflects our expectation that the company will operate with leverage close to or below 2.0x during the next 18-24 months while organic growth remains modest.
WASHINGTON D.C. (S&P Global Ratings) April 15, 2019-- S&P Global Ratings said today it revised its outlook on Legg Mason Inc. to positive from stable. At the same time, we affirmed our 'BBB' issuer credit and senior unsecured debt ratings and our 'BB+' debt ratings on the company's junior subordinated notes.
The positive outlook reflects our expectation that Legg is going to operate with leverage close to or below 2.0x during the next 18-24 months. Our forecast incorporates our expectation for the company to pay down its upcoming $250 million maturity of senior unsecured notes (due July 2019) and for the company's EBITDA to remain stable or grow modestly over the next two years.
Given the projected decline in leverage, we view the company's creditworthiness to be closer to that of other 'BBB+' rated peers such as Janus Henderson Group plc or Neuberger Berman Group LLC. Historically, we viewed the lack of leverage in Janus's capital structure more positively than Legg's more diversified and better performing portfolio. With our projected decline in leverage for Legg, we believe that the distance has shortened and could result in both companies at the same rating level. Neuberger, on the other hand, has lower leverage compared with Legg,its portfolio is less diversified and it has also been exhibiting mixed investment performance in some of its strategies. We think a decline in Legg's leverage, closer to Neuberger's, could also result in both companies at 'BBB+'.
We continue to view the company's liquidity as robust and supportive of the rating. Our assessment is based on the company's strong cash flow generation capabilities, sizeable cash on its balance sheet, and the undrawn $500 million unsecured revolving credit facility. The company's cash flow generation also benefits from a low cash tax rate as a result of the sizeable tax shield accumulated by Legg. We view the company's sources of liquidity as more than sufficient to offset short-term uses, including the repayment of the 2019 unsecured notes, dividends, share repurchases (if activated again), and, to a lesser extent, capital expenditures.
The positive outlook reflects our expectation that the company will operate with leverage close to or below 2.0x during the next 18-24 months while organic growth remains modest.
We could revise the outlook to stable if leverage does not approach 2.0x during the next 18-24 months. Furthermore, we could consider a downgrade if leverage does in fact increase to 3.0x or above as a result of lower cash flow generation or higher debt levels, or as a result of a significant deterioration on investment performance or AUM flows.
We could raise the ratings if the company operates with debt to adjusted EBITDA comfortably below 2.0x and we deem that decline in leverage to be sustained. We would expect under this scenario that the company's flows and investment performance remain stable or modestly positive.
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