Moody’s affirms Standard Life Aberdeen rating

Debt rating agency Moody’s Investors Service has affirmed Edinburgh-based asset management giant Standard Life Aberdeen plc’s A3 long-term issuer rating, and Baa1(hyb) subordinate (domestic) rating.

Moody’s said the outlook for Standard Life Aberdeen is stable.

Standard Life Aberdeen is currently changing its name to Abrdn, a branding move that has received a mixed response in financial markets.

Moody’s said that under new CEO Stephen Bird and with “unified brand and a clear strategic direction” it expects SLA to be able to “arrest the consistent decline in its revenue driven by significant net outflows” in recent years.

“The affirmation reflects SLA’s solid revenue scale and market position, its broad product set and solid distribution capabilities, a strong balance sheet and moderate leverage,” said Moody’s.

“Net outflows and investment underperformance have weakened SLA’s credit profile in recent years, but the company is starting to see improvement in both areas which, if sustained, will be positive for its revenue and margin outlook.

“The affirmation also reflects the company’s proactive management of its balance sheet which has allowed it to maintain a stable leverage ratio despite significant revenue contraction over the last several years.

“SLA’s A3 issuer rating also incorporates the concentration risk via SLA’s largest client, the Phoenix insurance group (Phoenix).”

Moody’s said the stable outlook reflects its expectation that SLA “will maintain its good business profile which benefits from a solid position in the asset management and UK adviser platform markets, where it is one of the leading players, with assets under management and administration (AUMA) of GBP535 billion.”

Moody’s said SLA “has a large product set, a diversified customer base, and strong distribution capabilities” with solid retail and institutional footprints.

“While business diversification is somewhat limited by the group’s reliance on Phoenix, in which SLA has a 14% shareholding, which represented 38% of the group’s AUM and 33% of adjusted profit before tax at YE20, this strategic partnership brings revenue protection to SLA until 2031,” said Moody’s.

“In 2020, the group’s net flow position significantly improved with the level of redemptions at their lowest level since the merger of Standard Life and Aberdeen in 2017, with the group’s three-year investment performance improving to 66% (FY 2019: 60%) of AUM ahead of benchmark.

“Under a new CEO with unified brand and a clear strategic direction, Moody’s expects the group to be able to arrest the consistent decline in its revenue driven by significant net outflows in recent years.

“This is notwithstanding some execution risk with redemptions still challenged in the UK and inherent pressures within the asset management industry.

“SLA’s financial profile benefits from a strong balance sheet with the group’s regulatory capital surplus increasing to GBP2.3 billion at YE20.

“Although SLA expect this surplus to be negatively impacted by c.GBP1 billion due to the implementation of the Investment Firm Prudential Regime (IFPR) from 1 January 2022, Moody’s expects the group’s capital base to remain a relative strength together with a liquidity profile which is supported by GBP2.5 billion of liquid resources — SLA’s recent decision to rebase its dividend is positive in this regard.

“The financial profile has also been supported by a significantly reduced level of debt in recent years which, notwithstanding the fall in earnings, has enabled the group to maintain a debt to EBITDA metric below 2x which is Moody’s expectation going forward.

“More negatively, SLA’s stakes in Phoenix and HDFC Life, both of which are now classified as listed investments as opposed to associates, enhance the group’s balance sheet risk and introduce volatility to the group’s profits.

“However, this is mitigated by the strategic nature of the Phoenix partnership and intention of SLA to monetise its stake in HDFC Life.

“A key credit weakness has been the depth of SLA’s performance trough — following declines in 2018 and 2019, fee-based revenue fell by 13% at YE20 with adjusted profit before tax down 17%.

“Furthermore, the quality of earnings has reduced with adjusted operating profit (fee based revenue less costs – this will become the group’s key performance indicator in 2021) declining by 27% following the 36% drop in 2019, with the group relying even more on Phoenix’s profit contribution.

“However, SLA should benefit from its focus on growing revenue especially in Asia, private markets, and the solutions business, and maximizing its operational synergies.

“Moreover, SLA will benefit from growth achieved by Phoenix.

“And with most of the group’s restructuring costs already incurred, the realisation of cost synergies, and a more positive outlook around the trajectory of revenue and operating profit, Moody’s believes that the group will be able to start reducing its cost income ratio which stood at a high level of 85% at YE20.”