Credit analyst not a buyer of Stilwell paper, given market conditions

By Ronda Fears

Nashville, Tenn., July 26 - Given market conditions and Stilwell Financial's vulnerability to the markets, Kathy Shanley, senior bond analyst at Gimme Credit, said she would not be a buyer of the money manager's paper.

Stilwell Financial (Baa1/A-) and its Janus mutual fund family are struggling to chart a new course in a rocky market but Shanley said that while the company may not have a liquidity crisis,it has diminishing funds to invest.

The analyst also noted in a report Friday that last month Thomas Bailey, the founder and longtime head of Janus, stepped down, leaving the company without a strong leader to spearhead a turnaround of its most important product line.

Stilwell reported Thursday that a drop in assets under management contributed to a 25% year-over-year drop in revenue and an 18% drop in net income to $74 million for the quarter ended June 30.

"It was hard to find any silver lining in the results this quarter, especially given the knowledge trends have only worsened over the past few weeks," Shanley said.

Revenues fell to just $310 million versus $328 million in the first quarter and $412 million a year ago. EBITDA slumped to $149 million from $178 million for the March quarter and $212 million a year ago.

Even as revenues were down relative to the prior quarter, expenses rose 6%, although part of the increase reflects non-cash compensation related to a one-time grant of 5% of Janus' equity to key employees earlier this year.

One positive development recently is that Stilwell managed to price a $200 million seven-year term debt offering, enabling it to extend debt maturities and reduce the amount outstanding under its bank credit facility to $85 million, down from $270 million at the end of June.

"As we've discussed previously, the $600 million bank facility includes triggers tied to the average level of assets under management," Shanley said.

"If managed assets, for a rolling three-month period, fall to between $170 billion and $180 billion, availability under the line drops to $500 million. The facilities are further reduced to $400 million if managed assets slip to between $150 billion and $170 billion, and cut to $300 million at levels below $150 billion."

Unsurprisingly, Stilwell's assets under management are down significantly, to $161 billion at the end of the second quarter versus $190 billion at the end of March and $220 billion a year ago.

The drop in the quarter reflects market losses of $22 billion combined with net redemptions of $7 billion.

"Better-diversified fund families are scrambling to hold onto assets by deluging investors with information about fixed income alternatives to equity mutual funds," Shanley said.

"Janus is at a disadvantage in this competition since 87% of its assets are in equity funds, with only 3% in fixed income and 10% in money market accounts. Considering the trends in the market this month, we would not be surprised to see managed assets drop below the $150 billion trigger level at the end of July."

The 364-day portion of the bank facility comes up for renewal at the end of October.

"We wouldn't be surprised to see the size of the bank credit agreement halved at that time," Shanley said.

Stilwell's investment in DST Systems contributed about $16 million in earnings for the quarter. DST is accounted for as an equity investment on Stilwell's books.

"We view DST as an asset potentially available as a source of liquidity," Shanley said.

"However, as Stilwell has been successful in refinancing most of its near-term debt and as the market value of DST is down sharply in recent weeks, we don't see a near-term need to monetize this investment."

Stilwell said Thursday it would continue to focus on paying down debt before considering share buybacks, a strategy we can only view as prudent, especially with the upcoming bank negotiations.

"We don't see an impending liquidity crunch at the company, but resources to reinvest for growth are limited," Shanley said.

"We wouldn't be a buyer of Stilwell debt, considering its dependence on market conditions."

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