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Rating Action:

Moody's affirms Emerald Acquisition's Ba2 CFR following dividend recap

09 Feb 2017

New York, February 09, 2017 -- Moody's Investors Service ("Moody's") has affirmed the Ba2 corporate family rating (CFR) to the recently formed holding company, Emerald Acquisition Limited (a/k/a "Russell Investments") following an announced $200 million add-on to its current outstanding $647 million senior term loan. Moody's has also affirmed the Ba2-PD probability of default rating (PDR). The reason for increasing the loan is to pay dividends to the equity owners.

Concurrently, Moody's has affirmed Ba2 ratings to the upsized, $847 million 7-year senior secured term loan and a $50 million revolving credit facility issued by co-borrowers Russell Investments US Institutional Holdco, Inc. and Russell Investments US Retail Holdco, Inc. The credit facilities were used to partially finance the $1 billion buyout of Russell Investments by two private equity sponsors -- TA Associates and Reverence Capital Partners -- from the London Stock Exchange Group (LSEG) in June 2016. The outlook on all ratings remain stable.

The incremental debt issuance is expected to have a marginal impact on Russell Investment's credit profile as the impact of the increase in leverage will be partially offset by positive earnings momentum resulting from the company's cost-reduction efforts. Furthermore, the company's leverage ratio may decline further should management meet its expense management goals in 2017.

RATINGS RATIONALE

The Ba2 corporate family rating reflects Russell Investment's solid position in the large and growing outsourced chief investment officer ("OCIO") market segment and its established position as a multi-asset solutions provider for institutional and retail clients. The rating is also supported by solid cash flow generation driven by consistently high asset retention rates and the company's broad geographic footprint. However, these strengths are offset by high leverage, low profitability and increasingly aggressive financial policies. Russell's recent loss of OCIO market share and minimal growth in outsourcing in recent years is a concern and we believe can't be fully explained by the publicity related to the sales process last year. While industry fundamentals point to favorable growth dynamics from increasing investment outsourcing, we believe Russell Investment's growth trajectory may continue to be challenged by the increasingly competitive dynamics in the OCIO market. These challenges have contributed to net outflows in recent years and we expect this headwind may remain over the near to medium term, although signs of stabilization in flows and improved sales emerged in 2016. We believe success for Russell Investments in the OCIO market will be much more dependent on relative investment performance and product innovation now that the uncertainty around its future ownership has been removed.

Pro-forma leverage at 6.5x (as calculated by Moody's, including adjustments for operating leases and a $150 million future payment obligation to LSEG) would increase modestly from the current 6.2x and continues to be in line with our expectations for a leveraged buyout transaction but still reduces the firm's financial flexibility. Weak profitability, as measured by pre-tax income margins also constrains the rating. The successful implementation of ongoing business efficiency initiatives and incremental benefits from near term savings identified by the private equity sponsors should help offset near-term profit pressures driven by elevated outflows and market volatility and lead to improved profitability over time. So far, expense cuts have exceeded expectations and we believe there is room for additional savings in 2017. Steady improvement in debt reduction and margin expansion will be a principal driving factor behind the potential for future upgrades.

The company's ratings and/or outlook could see upward pressure if Russell Investments reduces leverage below 3.0x; improves profitability in part by realizing identified cost savings; or if it recaptures and sustains it leadership position in the growing OCIO market.

Conversely, the ratings could face downward pressure if the demand for OCIO services declines or Russell Investments continues to lose OCIO market share. The rating could also be adversely impacted if management fails to achieve anticipated cost savings, which will be evidenced by pre-tax profit margin expansion. Though an additional dividend recapitalization is unlikely given a negative covenant on first lien net leverage in the loan agreement, Moody's would view additional debt-funded dividend payments to shareholders unfavorably.

The following ratings were affirmed with a stable outlook:

Emerald Acquisition Limited:

Corporate family rating: Ba2

Probability of default rating: Ba2-PD

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

$847 million senior secured term loan: Ba2

$50 million senior secured revolving credit facility: Ba2

The principal methodology used in these ratings was Asset Managers: Traditional and Alternative published in December 2015. 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 21 offices worldwide and $174 billion in assets under management ("AUM"), excluding its overlay, as of 31 December 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

David Wang
Asst Vice President - Analyst
Managed Investments Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Marc R. Pinto, CFA
MD - Financial Institutions
Managed Investments Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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