Key Ratings Drivers, IDRs and Senior Debt
Medellín, Colombia based Sura Asset Management’s ratings are highly influenced by its leading regional franchise and a risk appetite that Fitch views as commensurate with the company’s ratings. Sura Asset Management’s ratings also consider its consistent investment performance, stable earnings and cash flow, its ample expertise and sound risk management, as well as its debt service ratios that are consistent with rating category guidelines. Sura Asset Management is the leading mandatory pension fund manager (MPFM) in Latin America with the largest and most diversified franchise in the region. It has presence in six countries (including the region’s top four MPFM markets), it is about double the size of its closest competitor and — at Sept. 30, 2018 — managed 22.8% of the region’s pension fund assets, served more than 19.6 million customers and had USD138.9 billion in assets under management.
Fitch has affirmed the following ratings for Sura Asset Management S.A:
- Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘BBB+’; Outlook Stable;
- Short-Term Foreign Currency IDR at ‘F2’;
- Long-Term Local Currency IDR at ‘BBB+’; Outlook Stable;
- Short-Term Local Currency IDR at ‘F2’.
- Senior unsecured bonds at ‘BBB+’.
Sura Asset Management’s mandatory business has very sound market shares in Peru (38.8%), Colombia (36.9%), El Salvador (47.4%) and Chile (19.2%) and a strong presence in Uruguay (17.5%) and Mexico (14.8%). After the recent sale of its annuities insurance business, Sura Asset Management’s strategy is to concentrate on its core business of mandatory and voluntary savings. Sura Asset Management maintains a large and experienced team of investment professionals in each country where it operates and a sound risk management structure is in place. Market risk is relatively limited given the scope and long-term view of its investments, and the tight regulatory limits. However, it is exposed to market conditions as these affect the results of the managed funds and, therefore, the mandatory reserve or encaje.
In addition, while foreign exchange (FX) risk from the outstanding bonds is mostly hedged through derivatives, the company has a natural FX exposure from the investments it has in other countries and the volatility of the different exchange rates. This risk is partly mitigated by the company’s capital position, the diversification effect of having operations in six different countries and its long-term view, meaning any effects should be mitigated in the longer term.
Sura Asset Management’s financial performance deteriorated somewhat in 2018 mainly due to much lower results of the encaje given that the markets were atypically negative this year. Results from the encaje are unrealized results due to the mark to market of the investment portfolios, which do not affect the company’s cash flow as these are long-term investments, therefore these results should return to more normal levels as markets normalize. Sura Asset Management’s core operating revenues are quite recurrent and show limited volatility due to the mandatory nature of pension funds and the fee structure that governs the majority of its markets. However, the results of the operating companies are exposed to FX volatility when converted to U.S. dollars.
Sura Asset Management enjoys higher quality operating revenues than those of typical asset managers, having a greater proportion of fee-related earnings. Sura Asset Management’s total fees accounted for a high 60% of total operating revenues as of YE18 and its EBITDA margin (total adjusted EBITDA/operating revenues) averaged 64.6% for the past four years. In addition, fees are even higher if the revenues that come from the insurance business are included.
Sura Asset Management’s financial debt is concentrated at the parent level, with a comfortable maturity structure, and is moderate when compared with the entity’s EBITDA. Leverage (gross financial debt/adjusted EBITDA) and debt service (adjusted EBITDA/financial expenses) ratios have stood in the 2.0x-3.0x range and 7.0x-11.0x range respectively since 2014. However, given the reduction in Sura Asset Management’s EBITDA in 2018, these key ratios stood at 3.1x and 5.2x, well below the prior year.
Fitch expects Sura Asset Management’s EBITDA to recover to levels closer to the average of recent years as the valuation of the encaje recovers and gains comfort from its sound and predictable cash flow generation. Sura Asset Management’s IDR is one notch above Colombia’s because the company enjoys a strong credit profile and in 2018 it generated about 96.2% of its EBITDA in Chile, Mexico and Peru, with IDRs of ‘A’, ‘BBB+’ and ‘BBB+’, respectively, and country ceilings of ‘A-‘ or higher. Although Mexico’s IDR has a Negative Outlook, any hypothetical one notch downgrade will not automatically affect Sura Asset Management’s current IDRs. Although the main operating companies are regulated in their respective home countries, there is still some flexibility to transfer resources between entities.
Sura Asset Management’s is rated one notch above its parent (Grupo de Inversiones Suramericana; BBB/Stable), given its strong intrinsic credit profile and that it operates in a highly regulated business so that the potential transfer of capital or liquidity would be limited by the regulatory ring fencing in the different countries of operation. Nevertheless, Sura Asset Management’s ratings consider those of its parent given its clear corporate identity and the importance of reputation and trust in the financial services and asset management sectors. Senior Debt The rating assigned to Sura Asset Management’s senior unsecured bonds corresponds to the company’s Long – Term IDR, considering the absence of credit enhancement or subordination feature.
Rating Sensitivities, IRDs, and Senior Debt
The Rating Outlook for the Long-Term IDRs is Stable. Given the limitations of the current operating environments in the main countries that SUAM operates, a rating upgrade is unlikely in the short to medium term. Sura Asset Management’s IDRs are however sensitive to a change in Fitch’s assumptions around its EBITDA generation. Ratings could also benefit from a sustained improvement in Sura Asset Management’s financial profile, with leverage (gross debt/ EBITDA) improving and remaining below 1.5x and interest coverage (EBITDA/interest expense) rising and remaining above 12.0x.
Senior unsecured debt would generally move together with Sura Asset Management’s long-term IDR.
Should Sura Asset Management’s erode its credit metrics so that its debt to adjusted EBITDA ratio deteriorates and remains consistently above 3.0x or its adjusted EBITDA/financial expense remains well below 6.0x, its ratings could be pressured downwards. In addition, a significantly adverse change in regulation or dismal economic performance in its key markets could affect its ratings negatively. Finally, although not Fitch’s base case, a severe deterioration of its parent’s credit profile would weigh on its ratings as a contagion effect cannot be ruled out.