GCR Ratings (GCR) has extended the ‘Rating Watch Negative’ outlook on FCMB Asset Management Limited’s national scale ratings.
The ratings firm said in its latest note that the long-term and short-term ratings of A-(NG) and A2 (NG) respectively, were affirmed. According to GCR, the ‘Rating Watch Negative’ outlook is solely on account of the relatively weaker credit profile of FCMB Group Plc.
“We believe that FCMB Asset Management’s creditworthiness – on a stand-alone basis – is better than that of the group which has weakened due to lower capitalisation and risk assessment of the core operating entity – the bank”.
The rating agency explained that although FCMB Asset Management is not a significant contributor to the group’s assets or earnings, its integration within the group creates related party risks from which it is not insulated.
“.. in the absence of creditor ring-fencing, the asset manager’s credit profile reflects the strengths and weaknesses of the group, hence the rating cap”. GCR noted that the ratings are underpinned by FCMB Asset Management’s strong earnings profile which supports good operating cash flow and robust liquidity.
“The asset manager’s competitive position within the Nigerian asset management space remains relatively strong, supported by a track record of over 20 years, strong brand, and business relationships with related companies, especially FCMB”.
GCR said in the rating note that like most peers, FCMB Asset Management’s total assets under management (AUM) has grown significantly over the last five years due to the growing interest in Nigeria’s regulated capital market and fair value gains caused by the Naira devaluation – as players tend to hold around 40% to 50% of assets in foreign currency.
According to the rating note, FCMB Asset Management’s AUM grew by 81% to close the year at N218.2 billion or USD150.5 million both organically, and due to the impact of Naira devaluation on the foreign currency component of the AUM.
GCR estimated that FCMB Asset Management’s total managed assets account for about 5% of the industry total, placing it among the top seven players in a highly fragmented market. The rating firm analysts do not believe that much has changed over the past year in terms of the asset manager’s competitive positioning.
The ratings firm said FCMB Asset Management has plans to grow market share by expanding product offerings via a new fund which will invest in alternative assets, but it is not yet clear how this might impact its competitive strength given that other players have launched or are in the process of launching similar products.
“Overall, our assessment of FCMB Asset Management’s competitive position is slightly negative to the ratings to reflect a modest share (5%) of the market’s AUM and lack of global diversification as operations are solely in Nigeria£, GCR said.
FCMB AM’s earnings profile is defined by strong growth in the top line, stable revenue sources and good cost management, the rating note reads.
It added that since 2019, gross revenue has grown by a cumulative annual average of 42.1% underpinned by stable fee-based income.
In 2023 however, fair value gains accounted for about a third of gross revenues due to significant exchange rate movements, GCR said in its rating note, adding that upon normalisation (that is, ex-fair value gains) gross revenue grew by 43.2% to N1.7 billion or USD1.2 million in 2023.
The ratings agency revealed that FCMB Asset Management Limited’s stable revenue sources include management fees and commissions continue to account for over 80% of gross revenue.
“We do not expect this trend to change, but short-term exchange rate volatility means fair value gains may continue to support earnings in 2024”, GCR said in the note.
It explained that the asset manager’s normalised margin was slightly pressured in 2023 by rising inflation which caused a jump in operating expenses during the period.
Hence, normalised earnings before interest tax depreciation and amortisation (EBITDA) fell to 50.5% in 2023 from 60% in the prior year.
“Our assessment of earnings is positive to the ratings as we expect sustained topline growth largely from stable sources and EBITDA margin to remain above 50% over the rating horizon”.
According to GCR, FCMB Asset Management’s balance sheet is unlevered and has been so for the last five years, adding that there is no history of borrowing and there are no immediate plans to take on debt.
The ratings firm said as a result, the leverage assessment is positive, supported by strong operating cash flows and minimal working capital requirements.
It noted that these factors also contribute to the asset manager’s robust liquidity position evidenced by a 12-month forward liquidity coverage ratio above 3x.
The main source of liquidity remains funds from operations while working capital absorptions, as well as dividend payments, are the primary uses of liquidity, GCR stated.
Over 24 months, the ratings agency analysts expect available liquidity sources to cover uses by at least 1x. GCR reiterated that FCMB Group support is negative to the ratings as the credit profile of the consolidated group is weaker than that of FCMB Asset Management Limited.
The consolidated group’s anchor credit evaluation yields a risk score of 7.25 which translates to a national scale rating of A-(NG), the rating note explained. Hence, a negative group support score of -2 has been applied to FCMB AM’s risk score and the long-term rating capped at A-(NG).
Outlook statement
GCR said the ‘Rating Watch Negative’ outlook is maintained because the rating firm expects the capital position of the consolidated group to be remedied by equity injection over the next 12 months.
Also, GCR analysts said in the note that they expect FCMB Asset Management’s earnings to remain good with a normalised EBITDA margin of above 50%. The asset manager will maintain an ungeared balance sheet, while expected working capital absorptions will be adequately covered by funds from operations and cash holdings. Hence liquidity cover is not expected to fall below 2x over the near term, GCR stated.
