2015 Outlooks: U.S. Non-Bank Financial Institutions

Transcription

1 215 Outlooks: U.S. Non-Bank Financial Institutions

2 Summary of Non-Bank FI Sector and Rating Outlooks Sector Securities Firms Finance & Leasing Investment Managers BDCs Outlooks Rating Outlook Stable Stable Stable Neg Sector Outlook Neg Neg Stable Neg Rating Distribution Stable (%) 86.7% 88.5% 94.% 7.% Outlook/Watch Positive (%) 6.7% 7.7% 6.% 1.% Outlook/Watch Negative (%) 6.7% 3.8%.% 2.% Source: Fitch Ratings. As of Dec. 31, 214 1

3 North American Non-Bank Financial Institutions Securities Firms Finance & Leasing Investment Managers BDCs

4 Securities Firms: Regulatory and Profitability Challenges Offset by Strong Capital and Liquidity Outlook Drivers Securities Firm Macro Interest Rate Capital & Sub-Sector Uncertainty Sensitivity Profitability Leverage Liquidity Full-Service Securities Firms Interdealer Brokers Retail Brokers Note: - Negative driver. - Moderately negative driver. - Neutral driver. - Positive driver. - Moderately positive driver. 3

5 Regulatory Capital and Liquidity Requirements Constraining Broker-Dealer ROEs Fitch Core Capital / RWA Liquid Assets (% of Total Assets) (x) Morgan Stanley Goldman Sachs M14 (%) Morgan Stanley Goldman Sachs M14 Source: Company filings and Fitch Source: Companies and Fitch calculations Capital Markets Revenue - U.S. GTUBs ($bn) Advisory Equity Markets Debt Underwriting Equity Underwriting Fixed Income, Currencies & Commodities Source: Companies and Fitch calculations Return On Average Equity (%) Morgan Stanley Goldman Sachs Hypothetical Cost of Capital M14 Source: Company filings and Fitch 4

6 Interdealer Broker Cash Flow Leverage Up, as Lower Volumes Pressure EBITDA BGC Partners Inc. ($m) Leverage Debt EBITDA (x) Q14 TTM Source: Companies and Fitch Calculations GFI Group Inc. ($m) Leverage Debt EBITDA (x) Q14 TTM Source: Companies and Fitch Calculations ICAP plc ($m) 1,2 1, Leverage Debt EBITDA FY9 FY1 FY11 FY12 FY13 FY14 1H15 TTM Note: ICAP Plc's financial year-end is in March. FY14 adjusted for 35m in debt issued in March 214 to pre-fund 3m debt coming due in July, 215. Source: Companies and Fitch Calculations Tullett Prebon plc ($m) Leverage Debt EBITDA (x) H14 TTM Source: Companies and Fitch Calculations

7 Rising Rates, Revenue Diversity and Increased Trading are Among Tailwinds for Retail Brokers Positively Positioned for Rising Rate Environment (% of TTM Net Income) Charles Schwab* TD Ameritrade Up 1 bps 11.1% 17.9% Down 1 bps (4.2%) (2.75%) *Schwab could also benefit from a reversal of the $742mn (12.4% of net revenue) in money market fee waivers incurred in 214. Retail Broker Revenue Composition (%) Charles Schwab TD Ameritrade Trading Revenue Source: Company reports Net Interest Revenue Fee/Asset Management Revenue Trading Activity (DARTs) () 6, 5, 4, 3, 2, 1, Charles Schwab TD Ameritrade 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Company reports Debt-EBITDA (x) Charles Schwab TD Ameritrade Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Fitch calculated 6

8 North American Non-Bank Financial Institutions Securities Firms Finance & Leasing Investment Managers BDCs

9 Finance & Leasing: Asset Quality Reversion Expected, But Well Positioned for Rising Rates Outlook Drivers Profitability Challenges/ Declining Reserve Releases/ Competition Capital, Funding & Liquidity Levels Finance & Leasing Sub-Sector Asset Quality/ Residual Value Reversion Regulatory Challenges/ Opportunities Rising Interest Rate Environment Auto Loan/Lease Credit Cards Student Loans Mortgage Servicing Mortgage Origination Alternative Financial Services Aircraft Leasing Container Leasing Rental Car Truck Rental & Leasing Commercial Fleet Leasing Note: - Negative driver. - Moderately negative driver. - Neutral driver. - Positive driver. - Moderately positive driver. 8

10 Asset Quality Metrics At or Near All-Time Lows Fitch Auto ABS Indices: Net Charge-Offs (NCOs) Prime (%) Prime NCOs Subprime NCOs Subprime 2.5 (%) Credit Card Net Charge-offs by Issuer (%) Amex BofA CapOne Citi Discover JPM USB SYF ADS Note: Data is reflective of the last month in each quarter. Source: Fitch. Source: Fitch Student Loan Net Charge-offs (% of average loans in repayment) (%) NAVI SLM DFS, excl PCI loans* DFS Note: Discover metrics not comparable. Metrics calculated based on total loans. Source: Fitch Global Commercial Airline Net Profits ($bn) (1) F Source: IATA, Fitch North America Europe Asia-Pacific Middle East Latin America Africa 9

11 North American Non-Bank Financial Institutions Securities Firms Finance & Leasing Investment Managers BDCs

12 215 Outlook Drivers: Traditional Investment Managers Factor Increasing Competition/Passive Allocation Fee Pressure Interest Rate Sensitivity of Offered Products/ Reputational Risk Merging of Traditional/Alternative, Focus on Retail Consolidation/ Allocation to Larger Managers Growth Leverage and Liquidity Levels Outcome Outlook Impact Stable Growth of Index ETFs and Mutual Funds ($bn) 4, 3,5 3, 2,5 2, 1,5 1, 5 Index Mutual Funds Index ETFs Positive Impact Moderately Positive Impact Moderately Negative Impact Neutral Impact Source: Investment Company Institute 11

13 Second-Order Interest Rate Sensitivity for Traditional IMs AUM Mix (Sept. 3, 214) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Fixed Income Alternatives Equities Money Market Median Duration for Select Global IG Credit Funds (years) Managers shorten duration in anticipation of rate but reverse course when hike is delayed. Source: Company Filings, Fitch Source: Fitch, Fund Factsheets: Schroder International Selection Fund: Global Corporate Bond; Standard Life Investments Global Corporate Bond Fund; JPMorgan funds Global Corporate Bond Fund; Loomis Sayles Institutional Global Corporate Bond Fund; Goldman Sachs Global Corporate Fund 1; Old Mutual Investment Grade Corporate Bond Fund; Swiss Life ifunds Bond Global Corporates 12

14 215 Outlook Drivers: Alternative Investment Managers Factor Increasing Competition/Passive Allocation Fee Pressure Interest Rate Sensitivity of Offered Products/ Reputational Risk Merging of Traditional/Alternative, Focus on Retail Consolidation/ Allocation to Larger Managers Growth Leverage and Liquidity Levels Outcome Outlook Impact Stable Elevated or Increasing Leverage for Most Alternative IMs Debt/ FEBITDA (x) Blackstone ('A+') TTM 3Q14 Quantitative Benchmark for 'A' Category KKR ('A') Oaktree ('A') Apollo ('A-') Carlyle ('A-') Positive Impact Moderately Positive Impact Moderately Negative Impact Neutral Impact Source: Company filings, Fitch 13

15 Strong Realizations Drive Performance, But Challenge Deployment of Dry Powder for Alternative Managers Realized Performance Fees a ($m) Gross of Comp. Net of Comp. 2,5 2, 1,5 1, 5 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 BX Fee-Earning AUM Growth b ($bn) Private Equity Credit Peer Peer Hedge Fund Solutions Real Estate Peer ($bn) Q Dry Powder c ($bn) Fitch-Rated - All Segments (PE, RE, HF, Credit) (LHS) Preqin - All Buyout Funds (RHS) Q14 ($bn) Leverage (Debt / FEBITDA) d (x) TTM 3Q14 Apollo BX CG FIG KKR OAK Average a Aggregates APO, BX, CG, KKR, OAK, b c Fitch Peer Group includes BX, CG, FIG, KKR, OAK.BX Segments - PE Private Equity, RE Real Estate, HF Hedge Fund Solutions, Cred Credit. d FEBITDA Fee-related EBITDA. APO Apollo Global Management, BX Blackstone Group, CG Carlyle Group, FIG - Fortress Investment Group, KKR KKR OAK Oaktree Capital Group, Source: Company Filings. 14

16 Increasing Alternative IM Balance Sheet Co-Investment Increase Alignment of Interests But may require additional debt issuance to fund investment Increasing Balance Sheet Co-Investment Offset by Declining Debt/Equity Provide Investment Flexibility Enhance/Restore Asset Performance Seed New Strategies Expand Return Sources for Shareholders But potential for more concentrated investments across funds and balance sheet But could be throwing good money after bad But cost associated with strategies that don t meet expectations But investment income is highly correlated with management fees 14, 12, 1, 8, 6, 4, 2, Balance Sheet Co-Investments (LHS) Long-Term Debt (LHS) Debt/Tangible Equity (RHS) (x) Source: Company Filings, Fitch 15

17 North American Non-Bank Financial Institutions Securities Firms Finance & Leasing Investment Managers BDCs

18 215 Outlook Drivers: Business Development Companies Factor Competitive Underwriting Environment Dividend Coverage Pressure Rapid Growth Expansion into New Verticals Higher Effective Leverage Interest Rate Sensitivity Regulatory Framework and Opportunities Outcome Positive Impact Negative impact Neutral impact Outlook Impact Negative BDC Leverage Relative to Asset Seniority Debt/Equity 1.x.9x.8x.7x.6x.5x.4x.3x.2x.1x ACAS SLRC FSIC AINV FSC ARCC PNNT BKCC CCT TSLX.x % 5% 1% Senior Debt Investments (% of Portfolio) Source: Company Filings, Fitch 17

19 BDCs Show Strong Loan Performance Post-Crisis, But Competition Intensifying ARCC Investment Portfolio Growth a ($m) Senior Sub. SSLP Equity Peer M14 b Peer ($m) ARCC Portfolio Yields c (%) M14 Yield 1st Lien Yield 2nd Lien Yield on New Originations Leverage - Peer Average d (x) Debt/Equity (LHS) Debt EBITDA (RHS) Q14 (x) Dividend Coverage (NII / Dividends) e (%) TTM 3Q14 AINV ARCC BKCC FSC PNNT SLRC N.M Average a Portfolio Growth - Peer Group includes AINV, ARCC, BKCC, FSC, FSIC, PNNT, SLRC, TSLX. Equity includes common, preferred, other, real estate. 9M 14 is as of 9/3/14. b Note equity contents. c All yields at cost. 9M14 Yield on New Originations is average of Q1, Q2, Q3. d Leverage ratios include AINV, ARCC, BKCC, PNNT. e ARCC and BKCC NII (Net Investment Income) adjusted for non-cash incentive expense accruals. AINV Apollo Investment Corp, ARCC Ares Capital Corp, BKCC Blackrock Kelso Capital Corp, FSC Fifth Street Finance, FSIC FS Investment Corp., PNNT Pennant Park Investment Corp, SLRC Solar Capital Corp, TSLX TPG Specialty Lending. Source: Company Filings. 18

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21 Disclaimer Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT 2

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