Coronavirus-related market sell-offs to hit leveraged managers hardest

Money managers with high leverage and outsized exposure to equity-oriented strategies will come under the most pressure from market impacts caused by the coronavirus pandemic, Fitch Ratings warned.

The assets under management, earnings before interest, tax, depreciation and amortization and cash flow leverage of these managers will be hit most by increased volatility and market sell-offs, the agency said.

Most traditional money managers continue to generate positive cash flows in times of market stress, but those with higher leverage are likely to have less flexibility to combat the effects of further market sell-offs.

Fitch in a commentary published Wednesday said these issues "have already translated into negative rating actions," highlighting Invesco Ltd.'s rating outlook downgrade to stable from positive and a downgrade for Lazard Group to BBB+ from stable.

However, these pressures are offset by the very nature of money managers' business models, such as being balance-sheet light and cash flow generative, having the ability to reduce expenses to maintain margins and having strong cash balances.

Fitch modeled three stress scenarios to a global group of money managers. All three scenarios assume declines in assets under management. Overall, managers with more diversified business models and investment strategies were better able to withstand the impacts of falling fee revenues. Those with short-selling strategies were also able to offset some downside risk.

Under each of the stress scenarios, which carried various AUM declines and market sell-offs, EBITDA margins fell. However, this could be offset by the reduction of costs such as bonus payouts. Managers also tend to have cost flexibility to cut share repurchases or reduce dividends in order to improve their liquidity.