Moody’s Investors Service updated its methodology for rating money managers.
“Shifts in the sector’s dynamics and the rising position of alternative asset managers, supported by strong investor demand for alternative investments, prompted us to re-examine our framework for rating asset managers.” said Yaron Ernst, managing director of Moody’s managed investments group, in a news release issued Friday
The new methodology reflects input received from comments that Moody’s requested in October.
To assess each firm’s business and financial profiles, Moody’s considers four factors: market position, business diversification, financial flexibility, and profitability and revenue stability.
The market position factor analyzes the scale and strength of the franchise as well as characteristics of assets under management. Business diversification examines the geographic and product mix as well as product distribution.
Financial flexibility evaluates debt/EBITDA and shareholder equity levels, while the profitability and revenue stability weights income margin and looks at revenue growth over the past 20 quarters.
According to the news release, key changes include:
- assigning greater weight to a money manager’s financial profile in the rating scorecard;
- adjusting financial flexibility metrics to better account for performance fees;
- adjusting the assessment of risky assets held on a money manager’s balance sheet to account for their increasing importance and diversity; and
- enhancing and simplifying some business profile metrics to better capture market position and business diversification.
Mr. Ernst said the new methodology “better aligns our analytical methods and tools with the evolving asset management landscape, and will enable us to assess more systematically the risk factors for traditional and alternative asset managers, while providing greater transparency into their credit risk profiles.”
