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Fitch Affirms Legg Mason's IDR at 'A'; Outlook Remains Negative
NEW YORK-(Business Wire)-July 3, 2008 - Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Legg Mason (LM) following the firm's recent announcement that it has entered into capital support agreements (CSAs) with three additional money market funds managed by a subsidiary of the company. The Rating Outlook remains Negative.
Legg Mason Inc.
—IDR at 'A';
—Long-term debt at 'A'.
LM had previously announced its support of other subsidiary-managed money market funds via CSAs. Following LM's most recent announcement, it is now supporting all of its stable value funds with exposure to troubled assets via structured investment vehicles (SIVs). The new CSAs require LM to contribute up to $240 million to three money market funds if the funds incur a loss upon the sale of certain securities, or if certain other events occur.
For the quarter ended June 30, 2008, LM will recognize a non-cash pre-tax charge of $265 million related to all CSAs currently in place (of which $146 million is attributable to the three most recently supported funds). Total pre-tax charges to date resulting from LM's support activities over the last several quarters are approximately $873 million. Net of taxes and adjustments to employee incentive compensation charges to date are $468 million.
LM's overall business and financial profile is consistent with its long-term IDR of 'A'. The firm manages $950 billion (as of March 31, 2008) for clients worldwide, and has a diversified franchise with well-established investment subsidiaries active in equity, fixed income and alternative investments. Over the past six months, LM has proactively raised over $2 billion of capital (via convertible senior debt) to ensure it maintained the financial flexibility necessary to deal with its SIV-related issues. To date, Fitch believes the increase in LM's balance sheet liquidity mitigates the moderate decline in debt service metrics caused by the additional debt. The firm's cash position remains strong, and free cash coverage of supported money fund SIV-exposures is high.
Resolution of the Negative Outlook will ultimately depend upon the severity of LM's ongoing support-related charges. For example, if future support-related charges suggest that LM may have to raise additional capital in order to maintain financial flexibility, a downgrade is likely to occur. Additionally, subpar investment performance leading to net outflows in certain parts of its franchise and/or headwinds from declining equity markets could further pressure earnings and cause Fitch to take a negative rating action.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site
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