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Legg Mason (LM) Downgraded to Negative by Moody's

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Concluding the review initiated in January following the three acquisitions by asset manager, Legg Mason Inc. (LM - Free Report) , it was downgraded to ‘Negative’ by Moody's Investors Service, a rating arm of Moody's Corporation (MCO - Free Report) . However, the rating agency affirmed Baa1 for senior unsecured debt for the company reflecting its sound business profile, which would support the three acquisitions announced in January.

Though in its latest Securities and Exchange Commission filing, Legg Mason has announced its intention to raise new financing worth $1.2 billion, it plans to de-lever over time. Therefore, Moody’s confirmation of the current Baa1 level is justified as it believes a low debt level and deleveraged balance sheet at the completion of the acquisitions would enhance financial flexibility of the company.

Rationale behind the Downgrade

The outlook revision came on the back of credit concerns over Legg Mason’s financial flexibility and stability. For acquiring – EnTrust Capital, a provider of hedge fund solutions, Clarion Partners, a real estate investor and manager and Precidian Investments, a developer of intellectual property in the ETF and other fund areas, Legg Mason has announced its intention of raising new financing worth $1.2 billion.

Therefore, new financing along with three acquisitions also cater to certain other risks including integration risks for the company.  Following such a move by the company, under Moody’s approach, leverage would rise to 3.9 times from the base case level of 2.7 times. Further, financing these deals would increase intangible amortization and interest expenses, which in turn will reduce pre-tax margins to about 10%.

According to Moody’s, risks mentioned along with market volatility and competitive trends could impact Legg Mason’s growth prospects and financials.

The rating outlook is valuable for firms since these preserve investors’ confidence in the stock and boost creditworthiness in the market. However, a downgrade in the same lessens investors’ confidence and reflects the company’s weak financials.

We believe that Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix, strategic acquisitions and leverage to the changing market demography. However, several issues including regulatory headwinds keep us apprehensive.
Legg Mason currently carries a Zacks Rank #3 (Hold). A couple of better-ranked finance stocks are GAMCO Investors, Inc. with a Zacks Rank #1 (Strong Buy) and Prospect Capital Corporation (PSEC - Free Report) with a Zacks Rank #2 (Buy).

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