Fitch Rates Schroders' Upcoming Tier 2 Notes 'A-(EXP)'

Fitch Ratings has assigned Schroders plc's (A+/Stable) upcoming issue of sterling Tier 2 notes an expected long-term rating of 'A-(EXP)'.

The final rating is contingent upon the receipt of final documents conforming to information already received.

Fitch rates Schroders under the investment manager section of its Non-Bank Financial Institutions Rating Criteria (January 2024). The expected rating was assigned to the notes under Fitch's Bank Rating Criteria (March 2024), in line with its notching approach. This is because Schroders, a non-bank financial institution, is regulated prudentially under a similar framework as a bank due to having a UK wealth management bank (Schroder & Co. Limited) in its group.

Key Rating Drivers

The issue is indicatively GBP250 million with a 10.25 year maturity and a five-year call date. The expected rating is two notches below Schroders' Long-Term Issuer Default Rating (IDR), in line with Fitch's standard notching for Tier 2 notes. Fitch has not applied additional notching as the bonds do not contain features that give rise to incremental non-performance risk. Conversely, Fitch has also not applied narrower notching as the Tier 2 notes do not meet conditions for narrower notching outlined in the Bank Rating Criteria.

In line with standard Tier 2 notes issued by UK banks and non-banks subject to bank-like prudential requirements, the relevant resolution authority (the Bank of England) can resolve Schroders (and mandatorily write down or convert the notes into equity) should Schroders meet the conditions for resolution. In addition, through its statutory powers the UK resolution authority can override the bonds' contractual terms if it considers it necessary to restore the viability of the group.

Schroders does not currently have any outstanding corporate debt and Fitch expects its cash flow leverage (gross debt/management fee-related EBITDA) to remain low and comfortably below Fitch's 1.5x downgrade trigger following the Tier 2 issuance.

For more details on Schroders' key rating drivers, see 'Fitch Affirms Schroders at 'A+'; Outlook Stable' dated 19 September 2023 on fitchratings.com.

The rating of the Tier 2 notes is primarily sensitive to movements in Schroders' Long-Term IDR, the sensitivities for which are outlined below.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Evidence of an increase in balance-sheet risk appetite (e.g. from taking on material leverage resulting in a gross debt/(F)EBITDA ratio exceeding 1.5x);

An unexpected operational or reputational event challenging the robustness of Schroders' risk control framework;

Significantly reduced earnings (e.g. in the light of material net assets under management (AUM) outflows or a prolonged period of depressed market conditions reducing fee-earning AUM without adequate compensating savings in Schroders' cost base); and

Downgrade of the UK's sovereign rating to a level below Schroders' Long-Term IDR.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Near-term upgrade potential is limited, as ratings in the 'AA' category require performance stability that is difficult for investment managers to achieve, given the inherent sensitivity of their earnings to falling asset values amid market stress.

In the medium term, positive rating action would likely require growth that leads to both greater scale efficiencies and enhanced diversification of revenue.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.