Lagos, 12 May 2022 – GCR Ratings (“GCR”) has downgraded FSDH Asset Management Limited’s national scale long-term issuer rating to BBB+(NG) from A-(NG), while maintaining the short-term rating at A2(NG); with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|FSDH Asset Management Limited||Long Term Issuer||National||BBB+(NG)||Stable Outlook|
|Short Term Issuer||National||A2(NG)|
The rating downgrade reflects the deterioration in FSDH Asset Management Limited’s (“FSDH AM” or “the asset manager”) financial profile, as characterized by the marked dip in profitability, which led to negative shareholders’ funds in 2021. Also, cognizance was taken of FSDH AM’s loss of market share during the year. That said, a key rating uplift is derived from FSDH AM’s membership of FSDH Holding Company Limited (“FSDH Group” or “the Group”) and the demonstrated capacity of the Group to provide necessary support under a stressed scenario, particularly in view of the imminent additional capital injection.
The competitive position is a negative rating factor. FSDH AM’s total Asset Under Management (“AUM”) and estimated market share declined to N54bn and 2.5% in FY21 respectively (FY20: N87bn and 4%), following the eventual transfer of UPDC REIT (with a fund size of N30.9bn) to a new manager in May 2021. Going forward, FSDH AM expects to augment AUM through the launch of more customer-centric products (specifically targeted at retail investors), as well as expanding its geographic visibility within the local market. Furthermore, GCR positively considered the asset manager’s membership of FSDH Group, through which it continues to harness product distribution and cross-selling opportunities.
Although Management & Governance is a neutral rating factor, GCR took cognizance of the recurring changes of key management personnel over the review period. GCR will continue to assess this trend over the outlook horizon.
FSDH AM’s subdued earnings and negative shareholders’ funds represent a key rating concern. Impacted by a combination of fair value loss on financial assets, increase in interest expenses and impairment charges, the asset manager registered a net loss of N3.2bn in FY21. Consequently, FSDH AM ended the year with negative shareholders’ funds of N2.2bn. In a bid to normalise this, FSDH Group plans to inject additional capital of N2.5bn by the end of June 2022. Although the imminent capital inflow is expected to partly offset the existing (N5.9bn) payables, the sustained interest payment on the residual payables may constrain profitability over the short term.
Cash flow and Leverage assessment was constrained in 2021, as FSDH AM obtained a short-term loan of N5.9bn in May 2021 compared to its ungeared position at FY20. Although this loan was fully repaid in 2021, GCR took note of the fact that it was refinanced through one of its managed funds given its pricing sensitivity. Management’s plan to deploy the expected capital inflows towards the settlement of payables to customers will somewhat moderate the leverage position over the rating horizon.
The asset manager’s liquidity profile moderated in FY21, due to strains in operational cash flow based on the net loss position during the year. As a result, liquidity sources lagged the anticipated uses, as evidenced by liquidity coverage declining to 0.3x in FY21 versus 10.9x in FY20. While the liquidity metric would likely remain below 1x coverage in 2022, a strong rebound in profitability and the pay-off of outstanding payables may positively impact our liquidity assessment over the next 12-18 months.
The rating derives uplift from implied parental support from FSDH Group, given the evidence of operational and funding support, particularly in view of the imminent additional capital injection. We believe FSDH Group has the capacity to continue to support the asset manager based on its relatively good financial profile.
The Stable Outlook reflects GCR’s expectations that the successful capital injection by FSDH Group will normalize the negative shareholders’ funds and moderate outstanding payables, resulting in improved liquidity. While we are cognisant of the impact of sustained interest expenses on payables, GCR may positively consider a strong rebound in profitability over the rating horizon. GCR will continue to assess how quickly FSDH AM is able to rebuild its AUM to the pre-2021 level.
Further pressures on financial profile and competitive position could trigger a rating downgrade. Unless leverage and liquidity indicators improve towards 2020 levels, alongside profitability, we will likely lower the ratings. In addition, negative movement in FSDH Group’s ratings and sustained instability in key management personnel, could trigger a negative rating action. Conversely, a rating upgrade could stem from the successful capital injection, deleveraged balance sheet, a significant rebound in profitability and improvement in liquidity metrics. Furthermore, material improvement in AUM and market share will be positively considered.
|Primary analyst||Yinka Adeoti||Financial Institutions Analyst|
|Lagos, NG||Adeoti@GCRratings.com||+234 1 904 9462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, January 2022|
|Criteria for Rating Asset Managers, November 2019* appendix to the Criteria for Financial Services Companies, January 2022|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, December 2021|
|GCR Financial Institutions Sector Risk Score, December 2021|
FSDH Asset Management Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term Issuer||Initial/last||National||A-(NG)||Stable||March 2021|
|Short Term Issuer||Initial/last||National||A2(NG)||Stable||March 2021|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||2.00|
|Management and governance||0.00|
|Cash flow and Leverage||0.75|
|Earnings vs. Risk||0.50|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to FSDH Asset Management Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
FSDH Asset Management Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from FSDH Asset Management Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2021
- Three years of comparative audited numbers
- Unaudited financial results as at 31 March 2022
- Other related documents.