AMP shares rose 3% yesterday in the wake of Moody’s cutting the company’s rating and pushing from the A level (high grade) into the top tier of the B level (more speculative).
The agency lowered its ratings on AMP Group Holdings Limited and AMP Group Finance Services Limited from A3 to Baa2. AMP Bank was also lowered from A3 to Baa2.
The outlook for AMP Group entities has, however, improved to ‘stable’ from ‘review for downgrade’.
AMP said it continues to have a strong balance sheet and capital position, with surplus capital of $1.4 billion as at June 30.
The shares rose to $1.345 despite what was a pretty damning commentary on the company and its outlook.
Moody’s move came ahead of an announcement shortly on job losses from the merging of the previously independent AMP Capital back into the underperforming and poorly run parent.
In its report, Moody’s singled out weak performance, high costs, weak governance, and high leverage as areas of concern.
Moody’s said the downgrade “reflects the weaker operating results of the group and the ongoing challenges it faces in its wealth management business with respect to net cash outflows, which have remained high.”
“It also reflects AMP Group’s previous governance weaknesses, that have resulted in sustained reputational damage which continues to affect its business and operations,” the firm said in singling out probably the biggest concern about AMP and its immediate future.
“Moody’s regards AMP Group’s corporate governance weakness as a governance risk under its environmental, social, and governance (ESG) framework, given its implications for the company’s compliance and reporting.
“Today’s rating action considers the impact of AMP Group’s governance practices on its credit profile.
“We expect the uncertain economic outlook and coronavirus-related early withdrawal of superannuation funds will continue to constrain the group’s ability to attract new funds and grow assets under management.
“This is partly offset by the continued strong fund inflows in the group’s asset management operations, which demonstrate a high level of resilience, partially mitigating the more challenging environment in wealth management.
“Despite these challenges, Australia’s mandatory superannuation system is a supportive factor for AMP Group’s credit profile. Strong and predictable fund inflows into the superannuation system are supported by mandatory employer contributions, currently set at 9.5% of an employee’s wages and due to rise to 12% by mid-2025,“ Moody’s said in pointing to a rare positive for AMP.
“The negative pressure on superannuation fund inflows and margin compression will likely constrain the group’s revenue generation and profitability. While AMP’s transformation project should ultimately reduce costs and improve efficiency, the near-term investment needs will mean that improvements to net profits are likely to be limited in the next two years.
“AMP Group’s leverage, as measured by its debt-to-EBITDA, is high. This is partly mitigated by its sizeable liquid resources that could be utilized to reduce leverage if required. We expect that over time the group’s leverage measures will improve as it looks to reduce its debt levels.,” Moody’s said on Thursday.
