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Rating Action:

Moody's downgrades Franklin Resources to A2 from A1; outlook stable

04 Jun 2018

New York, June 04, 2018 -- Moody's Investors Service has downgraded the senior unsecured rating of Franklin Resources, Inc. (Franklin, NYSE: BEN) to A2 from A1 and revised the outlook to stable. The short-term rating of Franklin remains at P-1.

The following rating actions were taken:

Rating Actions:

--Issuer: Franklin Resources, Inc.

....Senior Unsecured, Downgraded to A2 from A1

....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1

....Subordinate Shelf, Downgraded to (P)A3 from (P)A2

....Junior Subordinate Shelf, Downgraded to (P)A3 from (P)A2

....Preferred Shelf, Downgraded to (P)Baa1 from (P)A3

Outlook Actions:

--Issuer: Franklin Resources, Inc.

....Outlook, Changed to Stable from Negative

Affirmations:

..Issuer: Franklin Resources, Inc.

....Commercial Paper, Affirmed P-1

The downgrade reflects Franklin's struggles over the past several years with market and stylistic challenges in areas of its core asset management expertise such as global fixed income and value equity investing. Performance volatility of its flagship products and competition with passive products have caused net outflows to remain at a high level, suppressing growth of assets under management (AUM) in a period when other managers have experienced strong growth. While Franklin retains considerable brand strength, its competitive position appears overly dependent on a market rotation in favor of value styles, with which its products are identified.

The company's rating continues to be supported by its strong balance sheet. It maintains considerable liquidity, despite paying down debt and making special dividend payments. The downgrade stems from our concerns that, despite Franklin's efforts to improve performance, introduce new products, and coordinate with its distributors (even as their business models change), its competiveness has not recovered adequately in the past three years to support a higher rating.

RATINGS RATIONALE

Franklin's business profile eroded as it lost AUM and its revenues declined, undermining the company's scale and franchise strength. We believe performance volatility of key products, the challenge of passive products' rising market share, and changes among the distributors upon whom it relies to sell its funds all weakened its competitive position.

Performance has remained volatile, pressuring its competitive position. The revenue trend has been flat for the past two years. Complicating the outlook are changes in the regulatory landscape, especially regarding the evolving application of fiduciary standards to distributors of its funds in the US, which potentially reduces the company's ability to induce its intermediaries to promote sales of its products. Franklin continues to innovate with new products, such as its growing family of ETFs, and multi-asset funds, but these will take time to have a material impact on its competitive position.

The company's financial flexibility, reflected in its low leverage and high cash coverage of its debt, remains an important credit support of its A2 rating, enabling it to bear greater pressure on its other credit metrics. Franklin's low leverage, at 0.8 times EBITDA as calculated by Moody's, and its strong liquidity give it exceptional resources and flexibility to invest in performance enhancements and new products.

Franklin's rating could be upgraded if the following occurs: 1) it sustains stronger investment performance and reestablishes positive net flows across its business lines, 2) it re-attains scale (revenue less distribution costs) of $5 billion, and 3) generally, restores a positive growth trend of revenues and margins.

However, the company's rating could be lowered if the following occurs: 1) it is unable to sustain competitive investment performance, or even despite better performance, its net flows remain weak, 2) its scale declines below $4.0 billion, or 3) the growth trends of its revenues and margins remain pressured.

Franklin Resources Inc., headquartered in San Mateo, California, and its subsidiaries provide investment management and related services to individual and institutional investors in both domestic and international markets. The company reported $727 billion in assets under management as of 31 March 2018.

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.

For more information, please visit https://www.moodys.com/fundsassetmanagement.

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.

Neal M. Epstein, CFA
VP - Senior Credit Officer
Funds & Asset Management 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

Marc R. Pinto, CFA
MD - Financial Institutions
Funds & Asset Management 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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