Fitch Rates Janus Capital Group 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has today assigned Janus Capital Group, Inc. (Janus) a Long-Term Issuer Default Rating (IDR) of 'BBB' with a Stable Outlook. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDR AND SENIOR DEBT

The ratings reflect Janus' adequate scale, good investment performance, experienced management team, limited use of leverage, sound execution against strategic objectives, and the strategic benefits of Janus' relationship with The Dai-Ichi Life Insurance Company (Dai-Ichi). Fitch also believes Janus maintains strong EBITDA margins and adequate liquidity for the current rating level.

Ratings are constrained by the firm's modest, although improving franchise position, weak net client flows over the last five years, and the firm's relatively higher assets under management (AUM) exposure to equities, which tends to be more volatile, although progress has been made in recent years to diversify by product and geography.

Rating constraints applicable to the investment management industry more broadly include the business model's inherent sensitivity to financial market trends, which could impact earnings and cash flows, and increasing investor preference for passively managed investment products which can contribute to active outflows and/or fee pressure.

The Stable Rating Outlook reflects that while upward rating momentum is possible, it would likely extend beyond the outlook horizon of 12 - 24 months, given the necessary time to assess the stability of asset flows. In the interim, Fitch believes that Janus' strong financial position moderates downside risk in the event of asset underperformance and/or outflows.

Janus is a global traditional investment manager, providing a broad variety of asset management services across different asset classes and jurisdictions. The company distributes its products under the brands of Janus, Intech, Perkins, Velocity Shares and Kapstream. With about $195 billion in company-wide assets at end-June 2016, Janus has adequate scale, although the firm remains significantly smaller than the largest industry players.

Under the leadership of current management, Janus has made significant progress reducing leverage, increasing AUM diversification and aligning its compensation structure with firm-wide performance to increase cost flexibility during periods of weaker performance and increase alignment of interest between investment professionals and shareholders. Fitch views execution on these fronts positively.

Janus maintains a relatively high focus on equities (76% of company-wide assets at end-2Q16), but in recent years the firm progressed in diversifying its product mix (fixed income built up to 24% of company-wide assets at end-June 2016 from 5% at end-2009) and expanding the institutional distribution channel (to 35% of company-wide assets at June 30, 2016) and international business. The latter grew at a 22% compound annual growth rate (CAGR) between 2009 and June 2016 and comprised 24% of total company-wide assets at June 30, 2016, compared to 8% at Dec. 31, 2009. The company also entered into a strategic partnership with Dai-Ichi in 2012, in which Dai-Ichi became a 20% shareholder of Janus. The strategic partnership provided Janus with about $7.1 billion in additional combined AUM from Dai-Ichi and its 50% affiliate, Dai-Ichi Asset Management (DIAM), as at end-June 2016 and further improves Janus' client access in the Japanese market.

Over the last two years, Janus added two very high profile investment professionals: Bill Gross and Myron Scholes. Gross manages the $2 billion Fixed Income Unconstrained Fund, while Scholes contributes to the firm's research and asset allocation capabilities. These hires should increase Janus' brand awareness among customers and contribute to the firm's target to establish itself as a thought leader in the marketplace. At this stage, neither individual is viewed as posing key man risk to Janus given the limited amount of AUM (as a percent of Janus' overall AUM) that they manage or are otherwise involved with.

Janus has faced net client outflows in recent years, averaging -6.2% per year over the last four years, driven primarily by lower overall market demand for the firm's key products (U.S. mutual funds). Outflows of this magnitude are viewed as consistent with a 'BB' category rating based on Fitch's quantitative benchmark for traditional investment managers of -5% to -10%. Positively, net outflows moderated to -1.4% in 2015 and -0.2% in 6M16. Despite the outflows, AUM growth has been positive (CAGR of 4.7% in 2011-1H16), supported by asset appreciation and solid investment performance. The majority of Janus' funds reported performance in the top two quartiles on a one-, three- and five-year basis; however, performance in the two most recent quarters declined slightly in the face of increased market volatility.

Janus generates strong operating margins, as reflected by an EBITDA margin of 32.1% for the trailing twelve months (TTM) ended 2Q16. Margins came under some pressure in 1H16 (a decline of 15bp compared to 2015) due to slower AUM growth, but remained consistent with a 'A' category rating based on Fitch's quantitative benchmark for traditional investment managers of 30% - 50%. Margins benefit from some degree of flexibility in Janus' cost structure, as variable-based compensation is linked to firm-wide profitability.

Cash flow leverage, as measured by gross debt/EBITDA, was modest at 1.3x for the TTM ending 2Q16, which is consistent with a 'A' category rating based on Fitch's quantitative benchmark for traditional investment managers of 0.25x - 1.5x. Maintaining a conservative leverage profile should provide the firm with certain financial flexibility in case of underperformance or financial market distress. Also, shareholder distributions are not outsized, relative to cash flow generation, in Fitch's opinion.

Seed capital investments amounted to $276 million or 16% of equity at June 30, 2016, which is slightly above higher-rated peers, which averaged around 10% of equity as of the same date.

Liquidity is viewed as reasonable, with cash and equivalents covering around 70% of the outstanding debt at June 30, 2016. Interest coverage, as measured by EBITDA/Interest expense was 13.6x for the TTM ending 2Q16, consistent with a 'A' category rating based on Fitch's quantitative benchmark for traditional investment managers of 12.0x - 18.0x.

Janus' senior debt ratings are equalized with the IDR, reflecting the largely unsecured funding profile and available unencumbered asset coverage to the senior debt. Senior debt consists of $300 million 4.875% senior notes due 2025 and 0.75% convertible senior notes due in 2018 with fair value of $165.9 million. The convertible notes may be converted if the share price is at least 130% of the conversion rate ($10.71 as at June 30, 2016) for 20 days during the period of 30 trading days ending with the last trading date of the preceding quarter. At the same time, Janus maintains full discretion over conversion to common stock or repayment of the fair value in cash.

According to Fitch's 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' criteria, the convertible senior notes receive no equity credit given that the notes rank pari passu with other senior debt instruments and the optional conversion feature cannot be relied upon during periods of distress.

RATING SENSITIVITIES

IDR AND SENIOR DEBT

Upside ratings potential could arise if the firm demonstrated consistently positive net client inflows, which translated into strong profitability metrics, while maintaining a conservative leverage profile and risk appetite. Ratings would also benefit from demonstrated asset stability in fixed income and non-U.S. investor products, through market cycles, which have grown materially in recent years.

Ratings could be negatively affected by a material deviation in Janus' fundraising or capitalization strategies, a sustained decline in investment performance, significant client outflows or material reputational damage. More specifically, gross debt/EBITDA approaching or in excess of 3.0x, EBITDA interest coverage approaching or less than 6.0x, or EBITDA margins approaching or less than 20% could also contribute to negative rating pressure.

Fitch rates the following:

Janus Capital Group, Inc.

--Long-term IDR 'BBB';

--Senior Unsecured Revolving Credit Facility 'BBB';

--Senior Unsecured Note rating 'BBB';

--Senior Unsecured Convertible Note rating 'BBB'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011259

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011259

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160906005794/en/

Fitch Ratings
Primary Analyst
Evgeny Konovalov
Director
+1-212-612-7839
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
or
Committee Chairperson
Sean Pattap
Senior Director
+1-212-908-0642
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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