GCR Ratings 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.
The rating downgrade reflects the deterioration in FSDH Asset Management Limited’s financial profile, as characterized by the marked dip in profitability, which led to negative shareholders’ funds in 2021.
Also, GCR said 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 and the demonstrated capacity of the Group to provide necessary support under a stressed scenario, particularly in view of the imminent additional capital injection”.
FSDH AM competitive position is a negative rating factor, according to GCR.
The firm’s total Asset Under Management (AUM) and estimated market share declined to N54 billion and 2.5% in FY2021 respectively from N87 billion and 4% in 2020, following the eventual transfer of UPDC REIT (with a fund size of N30.9 billion) 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, FCR stated in its rating note.
Furthermore, GCR positively considered the asset manager’s membership of FSDH Group, through which it continues to harness product distribution and cross-selling opportunities.
It said although Management & Governance is a neutral rating factor, GCR took cognizance of the recurring changes of key management personnel over the review period.
GCR said it will continue to assess this trend over the outlook horizon; adding that 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 N3.2 billion in FY2021.
Consequently, FSDH AM ended the year with negative shareholders’ funds of N2.2 billion. In a bid to normalise this, FSDH Group plans to inject additional capital of N2.5 billion by the end of June 2022.
“Although the imminent capital inflow is expected to partly offset the existing N5.9 billion payables, the sustained interest payment on the residual payables may constrain profitability over the short term”, GCR said in the report.
The rating hints that the company’s cash flow and leverage assessment was constrained in 2021, as FSDH AM obtained a short-term loan of N5.9 billion in May 2021 compared to its ungeared position at 2020.
GCR noted that the loan was fully repaid in 2021, the rating firm took note of the fact that it was refinanced through one of its managed funds given its pricing sensitivity.
According to the rating note, 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.
Again, the rating spotted that the asset manager’s liquidity profile moderated in FY2021, 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 2021 versus 10.9x in 2020.
GCR said 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 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”.
However, 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 cognizant 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”, the rating note stated.# GCR Downgrades FSDH Asset Management over Financial Erosion
