BlackRock's Outlook Lowered by Moody's on Debt Concern - Associated Banc (NYSE:ASB), BlackRock (NYSE:BLK)

　　BlackRock's BLK outlook has been downgraded to negative from stable by Moody's Investors Service. The action followed the company's announcement to acquire Preqin for almost $3.2 billion (£2.55 billion) in cash. This marked the second major deal for the company.

　　Also, the rating agency affirmed the senior unsecured Aa3 ratings of BlackRock and its subsidiary BlackRock Funding, Inc. Additionally, the company's long-term and short-term issuer ratings have been affirmed at Aa3 and P-1, respectively.

　　Reasons Behind Outlook Downgrade

　　The change in BlackRock's rating outlook to negative is attributed to the substantial size and scope of two significant acquisitions announced within a brief period. Alongside the recently disclosed buyout of Preqin, which will be financed through new debt, BlackRock Funding has already secured debt to finance the $3.0 billion cash component of its $12 billion acquisition of Global Infrastructure Partners (“GIP”). This GIP deal is expected to close later this year.

　　These acquisitions are set to elevate BlackRock's adjusted debt by more than $6 billion, taking it to approximately $14.7 billion. Consequently, the company's leverage ratio is projected to rise to between 1.6 and 1.7, slightly exceeding Moody's leverage-related downgrade trigger of 1.5.

　　While Moody's anticipates that BlackRock's leverage ratio will eventually decline below 1.5, this is unlikely to be achieved within the next 12 months.

　　The immediate financial benefit from Preqin is expected to be minimal, with projected revenues of $240 million in 2024, which is approximately 1% of BlackRock's overall revenues. The acquisition is driven by anticipated growth, as Preqin's revenues have witnessed a compound annual rate of around 20% in recent years.

　　Preqin, a leading private markets data provider, aligns well with BlackRock's evolving strategy of transforming into an investment services software platform. The integration is expected to generate revenue synergies as BLK combines Preqin's data with its alternative asset management platform, eFront, which facilitates the creation, management and monitoring of alternative asset portfolios.

　　The negative outlook underscores concerns that BlackRock's leverage may remain above the downgrade threshold of 1.5x adjusted EBITDA, even after the full integration of the Preqin and GIP acquisitions. Moody's will closely monitor the company's progress in integrating these acquisitions and fostering their growth. There is concern that the simultaneous absorption of two major acquisitions could strain BlackRock's management resources despite having a strong track record with large acquisitions.

　　Factors Influencing Future Ratings

　　For BlackRock to maintain its current rating, it must demonstrate success in accelerating growth in technology-based revenues, increasing investment advisory and performance fees from alternative management and reducing its leverage multiple. Conversely, a lack of progress in achieving acquisition goals and reducing leverage could result in a downgrade.

　　Given the negative outlook, a rating upgrade is unlikely in the near term.

　　Our Take

　　As pointed out by Moody's, BlackRock has sufficient experience in integrating large deals. Hence, we believe once the Preqin and GIP acquisitions are complete and the company starts generating synergies, a high debt burden will not be a major concern.

　　Over the past year, shares of BlackRock have gained 13.7%, underperforming the industry's rally of 26.3%.

　　Currently, BLK carries a Zacks Rank #3 (Hold).

　　Rating Actions Taken by Moody's on Other Financial Firms

　　Last month, Bank OZK's OZK ratings and outlook were affirmed by Moody's Ratings. This decision underscores the balance between the bank's strong financial metrics and the risks associated with its substantial exposure to commercial real estate (CRE) loans.

　　The rating agency has affirmed all the ratings and assessments of Bank OZK, including its long-term local currency deposit rating of A3 and short-term local currency deposit rating of Prime-2. Despite the affirmation, the outlook on the bank's long-term deposit and issuer ratings remains negative.

　　Further, Associated Banc-Corp's ASB outlook was reaffirmed as stable by Moody's. The rating agency also reiterated the company's Baa3 standalone baseline credit assessment. Further, the company's issuer rating of Baa3 for long-term senior unsecured notes remained unchanged.

　　Per Moody's, ASB's ratings affirmation reflected the balance between its credit headwinds due to its significantly concentrated portfolio in CRE loans and the offsetting qualitative and quantitative risk mitigating factors.