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Moody's says asset managers to benefit from European bank deleveraging

Global Credit Research - 08 Aug 2012

London, 08 August 2012 -- Credit-oriented investment managers are expanding their assets under management (AUM) by acquiring bank-loan portfolios for their third-party clients, says Moody's Investors Service in a new Special Comment published today. These managers are also stepping in to lend third-party funds to corporates and small and medium-sized enterprises (SMEs), which have been traditionally served by European banks.

Moody's says that asset managers with the necessary credit-analysis experience are best placed to take advantage of this opportunity to engage in bank loan portfolio acquisitions and direct lending for their third-party clients. However, Moody's notes that this opportunity is not without challenges as (1) banks may face hurdles in selling these portfolios due to the challenges of agreeing on valuation; and (2) several regulatory challenges will have to be overcome in order for managers to fully realise the opportunities left by deleveraging European banks.

The number of jurisdictions and legal regimes within Europe requires a unique expertise to participate in both loan portfolio acquisitions and direct lending. Moody's notes that managers without an expertise in this area run an increased risk of future losses if they are to invest in sectors and regions in which they lack such expertise.

The new report, entitled "Select Asset Managers Benefit from European Bank Deleveraging," is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

This growth opportunity for asset managers follows the plans by European banks -- driven by market and regulatory pressures - to reduce assets over the course of 2011-13. According to the IMF's April 2012 Global Financial Stability Report, such assets are estimated at nearly €2.0 trillion.

"Managers that have the knowledge and ability to evaluate and price credit risk across a variety of European domiciles and sectors will have a unique opportunity to compete for the acquisition of these portfolios. For managers with this niche credit-investment expertise, this opportunity is credit positive, as the expansion of their third-party AUM will generate a longer-term, stable stream of investment management fee income," explains Michael Eberhardt, a Moody's Vice President - Senior Analyst, and the author of the report.

Moody's says that the timeframe and sizeable pipeline outlined by the IMF report and investor surveys, indicates that the credit-positive effects will offer a medium- to long-term benefit to asset manager franchises. In taking advantage of European bank deleveraging, niche credit-investment managers are developing credit-investment vehicles that offer risk-and-return profiles that can help satisfy the long-term investor need for yield and assets that generate stable performance in a challenging economic environment.

"Despite the advantages for credit-oriented managers, the longer-term nature of the investment holding period required by both investment opportunities implies that managers who lack the necessary credit expertise and staff resources will find it difficult to raise third-party funds in order to take advantage of these opportunities," adds Mr. Eberhardt. "In addition, the extension of credit by asset managers without the requisite expertise to understand and price these assets, or originate new lending to sectors in which they have no expertise, will potentially experience losses and generate unfavourable returns for their third-party investors."

However, regulatory and operational issues remain. By lending to corporates and SMEs, asset managers will need to placate regulator concern for the systemic risks posed by this disintermediation of traditional banking. With regards to systemic concerns, Moody's says that the challenge is reduced as the public sectors in several European countries, including the UK, have acknowledged the need for new sources of funding in meeting the needs of SMEs, at a time when European banks are pulling back.

Apart from asset-manager specific concerns, Moody's says that the process of bank deleveraging is not going to offer a smooth pipeline for asset managers to grow their franchises, because banks will find it difficult to sell assets at a time when asset prices are subject to negative pressures due to the macroeconomic backdrop.

Subscribers can access this report via this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143575.

* * * * * *

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Michael Eberhardt, CFA
Vice President - Senior Analyst
Managed Investments Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yaron Ernst
MD - Managed Investments
Managed Investments Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's says asset managers to benefit from European bank deleveraging
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