Money management firms with heavy outstanding debt, such as Nuveen Asset Management and Marsico Capital Management, face higher risks of ratings downgrades in the current bear market, according to a Moodys Investors Service report.
While debt ratings of managers typically take wide cyclical market swings into account, the speed and breadth of the current declines make it different this time, and firms that were leveraged going into the second half of 2008 are at a higher risk for rating pressure than unleveraged firms, the report said.
Moodys cited a firms interest coverage the ratio of its earnings before interest, taxes, depreciation and amortization to the interest expenses on its debt as a key factor.
In a listing of rated managers included in the report, Marsicos total debt of $2.479 billion stood at roughly 8.5 times its EBITDA, with its EBITDA just sufficient to cover the firms interest expense. On Dec. 18, Moodys lowered Marsicos rating one notch to B3, and its outlook was changed to negative. Nuveens $3.565 billion in debt was 10.8 times its EBITDA, which was likewise roughly equal to that firms interest expense. On Dec. 12, Moodys lowered Nuveens rating one notch to B2, which remained on review for downgrade.
By contrast, AllianceBernstein, with a stable A1 rating, has been hit hard by the plunge in equity markets, but its $762 million in debt comes to only half its EBIDTA, and its EBIDTA is 100 times its annual interest expense, according to Moodys report.