Fitch Affirms Lazard Group LLC's IDR at 'BBB'; Outlook Revised to Positive
NEW YORK -- March 19, 2013
Fitch Ratings has affirmed Lazard Group LLC's (Lazard) Issuer Default Rating
(IDR) and long-term senior unsecured debt rating at 'BBB'. The Rating Outlook
has been revised to Positive from Stable.
KEY RATING DRIVERS
The revision of the Rating Outlook to Positive from Stable reflects Fitch's
expectation that Lazard will continue to reduce financial leverage, strengthen
interest coverage and improve its operating performance. Affirmation of the
ratings reflects the firm's relatively low-risk balance sheet and significant
franchise as a global independent financial advisor. Conversely, rating
constraints include a relatively narrow product offering, the cyclicality of
its business model and high compensation expenses relative to other financial
Both the financial advisory and asset management businesses continued to
perform well during 2012. Financial advisory revenue was up 6% during 2012,
driven mainly by mergers and acquisitions (M&A) and strategic advisory, where
activity picked up during the second half of the year. Restructuring revenues
declined as economic conditions stabilized, but at a much more modest pace
than they did in 2011. Momentum in M&A activity continued into the first
quarter of 2013 (1Q'13) and Lazard has advised on a number of large
transactions, including HJ Heinz and US Airways/American Airlines. Fitch views
the firm's independence as an important competitive advantage. Lazard's lack
of significant trading, underwriting and distribution activities helps the
firm avoid conflicts of interest with its clients, which many of its larger
competitors have to face.
Asset management has contributed close to half of Lazard's operating revenues
for the past two years, and is viewed by Fitch as an important source of
revenue diversity. Assets under management (AUM) grew by 18% during 2012,
primarily as a result of market appreciation. Lazard was able to generate
relatively modest net inflows of $2.7 billion during the year, compared to
$1.0 billion of net outflows in 2011. An increase in net inflows typically
follows a period of strong performance, and Fitch expects to see additional
AUM expansion in 2013. Lazard's international equities and emerging market
funds, which remain its top focus, have performed well relative to their
While Lazard experienced modest fee compression during 2012, its fees have
generally held up better than many of its peers that cater to developed
markets. Fitch believes Lazard's fees could come under additional pressure if
more asset managers expand into emerging and developing markets. Lazard's AUM
is concentrated in global equities, with an emphasis on emerging markets.
Fitch believes this potentially exposes the firm to increased outflows in a
risk-off environment, as investors may decide to reduce their allocations to
emerging market equities more rapidly than other sectors. Furthermore,
Lazard's focus on institutional clients limits investor diversity and may
impact the pace of fund redemptions during a period of stress or
Lazard remains focused on controlling headcount and compensation expenses
while attracting and retaining talented professionals. The firm's awarded
compensation ratio (as calculated by Lazard) declined to 59.4% in 2012 from
62.0% in 2011. The cost saving initiatives announced in October 2012 should
facilitate a further reduction in the compensation ratio to the targeted range
of mid- to high-50%. Lazard has recorded most of the one-time cash charges
associated with staff reductions in 4Q'12, and will record some additional
charges during the first half of 2013. While the one-time charges have an
immediate impact on profitability, the longer-term reduction in the expense
base is viewed positively by Fitch. Lazard's reported compensation expenses
continue to be affected by the amortization of prior years' deferred incentive
compensation, which will decline over the next several quarters.
The amount of capital returned to the firm's shareholders has increased
significantly over the past several years and hit a peak in 2012. Dividends
and share repurchases totaled $540 million in 2012, which is up 44% from the
prior year. On the whole, Fitch views these actions as negative for the firm's
creditors. However, given the low capital requirements of the business and
Lazard's clearly articulated strategy of returning 'excess' capital to
shareholders, the reduction in equity capital is incorporated into the
ratings. Fitch will continue to assess the capital management strategy in the
context of future rating momentum.
Fitch expects to resolve the Positive Outlook over the next 12-24 months. Key
catalysts for a positive rating action would include a demonstrated commitment
to maintaining lower financial leverage and improved interest coverage ratios,
as well as a reduction in the amount of share repurchases and improved
operating performance. Demonstrated progress on operating efficiency, as
measured by the 25% operating margin target articulated by Lazard, will also
be an important rating driver. Any potential upgrade would likely be limited
to one notch due to the company's relatively narrow product offering and
cyclicality of its main businesses.
Significant declines in financial performance or weak market conditions could
put downward pressure on the ratings and/or Rating Outlook. Significant
deterioration in the currently strong cash versus long-term debt levels could
also adversely impact Lazard's ratings. Current ratings incorporate the
cyclical nature of Lazard's businesses and reflect an expectation that EBITDA
will vary with broad business and market cycles.
Lazard is a well-established global investment bank that operates two main
businesses: financial advisory and asset management. Financial advisory
remains the cornerstone of the franchise and includes both M&A and
restructuring. Asset management has established a good foothold, and average
assets under management (AUM) levels have trended higher over the past couple
of years. Lazard's competitive advantages are its highly experienced
professionals, global reach and independent status.
Fitch has affirmed the following ratings:
Lazard Group LLC
--Long-term IDR at 'BBB', Rating Outlook revised to Positive from Stable;
--Senior debt rating at 'BBB'.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Securities Firms Criteria' (Aug. 15, 2012);
--'Investment Manager and Alternative Funds Criteria' (Dec. 17, 2012).
Applicable Criteria and Related Research
Global Financial Institutions Rating Criteria
Securities Firms Criteria
Investment Manager and Alternative Funds Criteria
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Joo-Yung Lee, +1-212-908-0560
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Ilya Ivashkov, CFA, +1-212-908-0769
Ed Thompson, +1-212-908-0364
Brian Bertsch, +1-212-908-0549
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