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Rating Action:

Moody's affirms Ba2 ratings of Russell Investments; Outlook changed to negative

08 Apr 2021

New York, April 08, 2021 -- Moody's Investors Service, ("Moody's") has changed the outlook on the ratings of Russell Investments Cayman Midco, Ltd. (a/k/a "Russell Investments") to negative from stable based on a $407 million incremental borrowing on its existing senior secured term loan due May 2025 to fund a dividend to shareholders. Concurrently, Moody's has affirmed Russell Investments' Ba2 Corporate Family Rating and the Ba2 senior secured term loan and revolving credit facility ratings.

The net proceeds from the incremental term loan borrowing, together with balance sheet cash, will be used to a pay a dividend distribution of $406 million and to prepay $107 million in existing debt maturing in 2023. This is the company's third dividend recap since it was purchased by its private equity sponsors in 2016.

LIST OF AFFECTED RATINGS

Issuer: Russell Investments Cayman Midco, Ltd.

Affirmations

Corporate Family Rating, Affirmed Ba2

Probability of Default Rating, Affirmed Ba2-PD

Outlook Actions:

Outlook, Changed to Negative from Stable

Issuer: Russell Investments US Institutional Holdco, Inc./Russell Investments US Retail Holdco, Inc., as co-borrowers:

senior secured term loan, Affirmed Ba2

senior secured revolving credit facility, Affirmed Ba2

Outlook Actions:

Outlook, Changed to Negative from Stable

RATINGS RATIONALE

The change in outlook to negative from stable reflects the risk the Russell's credit metrics will remain weak for the current Ba2 rating over the next 12-18 months due to the re-leveraging effect of the dividend recapitalization. Recent negative trends in the company's net flows and net revenue growth could constrain organic EBITDA growth and result in the company's leverage (Moody's-adjusted debt/EBITDA) remaining elevated over the next 12-18 months. Pro-forma leverage will increase to 4.6x as a result of the transaction from 3.7x at year-end 2020. The negative outlook also reflects Russell's private equity owners' propensity to use leverage and existing balance sheet liquidity to fund large shareholder dividends.

Russell has made progress in deleveraging its balance sheet from its last dividend recapitalization transaction in May 2018. However, the principal driver of the deleveraging has been the realization of cost savings. While we believe the company has more room to cut costs, deleveraging over the next 12 -- 18 months will require accelerating revenue growth. This will be a challenge as Russell's revenues have declined for three consecutive years amid fee pressure and net outflows.

On 30 April, Russell announced a strategic partnership with Hamilton Lane, a well-known and respected alternatives asset manager. This partnership will bolster Russell's private markets offering and improve the competitiveness of its solutions platform relative to other outsourced chief investment office space (OCIO). However, these benefits will develop over time and are unlikely to offset the impact of the increased leverage in the near term. In addition, Russell has taken steps to improve lead generation, refine its retail sales effort and modernize its OCIO offering. But the successful execution of these initiatives remains to proven.

The Ba2 corporate family rating is supported by the company's solid business profile, underpinned by its (1) large recurring revenue base; (2) strong AUM retention rates; and (3) high degree diversification by geography. The company's rating is constrained by high leverage, low profitability as measured by the pre-tax margin, weak organic growth and aggressive financial policies. Russell Investments is a leader in the OCIO market, which has been experiencing solid growth in recent years as institutions seek more resources and fiduciary oversight. However, the company's asset growth has not kept pace with overall OCIO growth, which the company is seeking to address, as noted above.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade is unlikely in the next 12-18 months. The company's ratings and/or outlook could see return to stable if Russell Investments reduces leverage below 4.5x; revenue growth accelerates and the company achieves positive operating leverage; and net flows improve substantially from a weak 2020.

Conversely, the ratings could face downward pressure if Russell Investments fails to reduce leverage as calculated by Moody's below 4.5x; net outflows continue at a high level; and/or revenue growth remains stagnant; or Russell Investments does another dividend recapitalization.

The principal methodology used in these ratings was Asset Managers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186105. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Russell Investments, head quartered in Seattle, WA, is a global asset manager with $217 billion in assets under management ("AUM"), excluding its overlay, as of 31 December 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dean Ungar, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert M. Callagy
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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