Fitch Affirms and Withdraws AllianceBernstein Ratings

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has today affirmed AllianceBernstein LP's (AB) long-term and short-term Issuer Default Ratings (IDRs) at 'A+' and 'F1', respectively. The Rating Outlook is Stable. Fitch has simultaneously withdrawn the ratings for commercial reasons.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT

AB's ratings reflects its strong investment management franchise, particularly in fixed income, low financial leverage, solid interest coverage, and improving operating performance. These strengths are balanced against AB's AUM sensitivity to broader financial markets, middling AUM growth, historically weak, albeit improving, investment performance in equity strategies, and earnings and operating margins which still lag historical and peer levels.

AB has maintained among the lowest leverage ratios (gross debt to adjusted EBITDA) and highest interest coverage ratios (adjusted EBITDA to interest expense) of all the investment managers in Fitch's rated universe, factors that support the current ratings and outlook because they afford AB significant financial and capital flexibility.

Debt, which is comprised of commercial paper (CP), increased from $325 million at 2Q14 to $455 million at 2Q15. Despite the increase in CP, higher EBITDA limited the impact on the leverage ratio which increased from 0.38x for TTM 2Q14 to 0.50x for the trailing twelve months ending (TTM) 2Q15. Interest coverage, measured as adjusted EBITDA to interest expense, remained strong at 425.5x for TTM 2Q15, reflecting AB's low debt levels and minimal cost of debt issuance.

AB has taken steps to reduce and control its expenses, particularly those related to compensation and occupancy. As a result, operating margin, adjusted for non-cash charges, increased to 24.2% in 2014, up from 24.0% in 2013 and 18.8% in 2012. Despite these positive results, operating margins have lagged pre-crisis levels of high-20s% to low-30%, and industry peer margins. Given the expense initiatives already undertaken, Fitch believes that further margin expansion will be dependent upon AUM growth that translates into top line revenue growth.

Recent growth in fixed income AUM, which has experienced very strong investment performance, has been offset by declines in equity AUM due to weak investment performance, although equity performance is improving in more recent periods. Though exposure to fixed income products (53% of AUM) may increase investment performance risk in a rising interest rate environment, AB's product and client diversity and good investment performance in fixed income AUM should help mitigate some of this pressure. Additionally, the firm has developed and launched several new products in anticipation of the interest rate rise, which should also help manage the effects. New product and strategy launches in addition to positive recent performance (if sustained) could lead to consistent positive equity flow, balancing the firm's AUM.

Fitch notes that AB has kept its seed capital investment portfolio around $500 million over recent years. Seed capital investments decreased slightly to $502 million in 2Q15, from $512 million in 1Q15, and accounted for 59% of AB's tangible equity in 2Q15. AB has strict controls for managing its seed investments -- almost two-thirds of the exposure is at least partially hedged, and the portfolio is regularly recycled into new funds to make sure balances do not grow materially over time. Still, Fitch considers these investments as having varying levels of liquidity which could result in capital losses and therefore expects this exposure to be conservatively managed.

Fitch has affirmed and withdrawn the following ratings for AllianceBernstein LP:

--Long-term Issuer Default Rating (IDR) at 'A+'; Outlook Stable;

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--Global Non-Bank Financial Institutions Rating Criteria (Apr. 28, 2015).

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989331

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989331

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/20150811006334/en/

Fitch Ratings
Primary Analyst
Tyra Junaid
Director
+1-212-908-0291
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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