Old Mutual, Nedbank ratings under review

Posted On Wednesday, 28 January 2004 02:00 Published by
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Old Mutual under the spotlight

Moody's Investors Service today placed the A2 senior debt and Prime-1 commercial paper ratings of London-listed South African financial services group Old Mutual plc (OML) and other ratings of Old Mutual Group entities on review for possible downgrade.

The rating agency also said it had placed its C+ financial strength rating (FSR) of Old Mutual's 53% held subsidiary, South African banking group Nedbank Limited (NED) under review for possible downgrade.Moody's said the rating review will focus on the operational challenges and possible financial pressure that the Old Mutual Group faces in a couple of its core operational areas.

"Firstly, the Nedcor Group, 53%-owned by OM, has recently announced a capital strengthening programme aimed at offsetting certain trading- and accounting-related charges as well as having implemented some significant changes to management in recent months. In addition, Moody's views the ongoing integration by Nedcor of the recently acquired Board of Executors ("BoE") as remaining challenging in the short term, and earnings from Nedcor are expected to remain depressed," the rating agency stated in separate releases from London and Limasol on Tuesday evening.

Moody's added that OM's role in providing capital support to Nedcor is likely to have somewhat weakened the Old Mutual Group's internal financial flexibility, particularly within South Africa, and that the review will therefore consider the effects on the group of providing such internal support. The recently announced proposed acquisition of minority interests in general insurer Mutual & Federal, although sound from a business perspective, may also add further pressure to internal flexibility within South Africa.

"The review process will also focus on the ongoing discussions between one of OM's US fund management subsidiaries, the Securities and Exchange Commission and other federal authorities in relation to 'market timing' issues for mutual fund firms in the US. Given the significant contribution of its total US fund management business, any possible fines could prove material in the group context. Although this process only currently relates to a relatively small proportion of the Group's US fund management business, Moody's ratings review will assess the financial and operational (business growth) risks that the outcome of this process could have in the medium term, particularly given the importance of these hard currency earnings to the group."

Commenting on the review of Fidelity & Guaranty Life (F&G Life), Moody's views this company as continuing to grow aggressively, generating surplus strain and statutory operating losses, requiring it to be dependent upon regular capital infusions from the OM Group. 

"In addition, F&G Life makes use of sizeable reinsurance programmes with a related-party offshore reinsurer; it also maintains above-average holdings of speculative-grade bonds and relies on independent distribution of its products. As a result, Moody's rating review will also focus on the impact on the group of funding F&G Life's continued growth, the stand-alone intrinsic rating of F&G Life and the growing size and importance of this higher-risk operation in the context of OM's credit profile," Moody's stated.

"Moody's notes that Old Mutual plc has progressively reduced leverage in recent years, and currently maintains substantial cash reserves resulting from previous asset sales," it added.

Last modified on Monday, 12 October 2015 22:47

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