The Long and Short
Good relative value in Legg Mason
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Legg Mason (LM) has had an unconditional and irrevocable guarantee from parent company Franklin Resource (BEN) since 2021. But the LM 2044 notes still trade at a compelling discount to BEN debt as well as to the broader and higher-rated segment of brokers, asset managers and exchanges. That includes the 2043 notes issued by split-rated peer Invesco (IVZ: A3/BBB+/A), which currently trade about 10 bp tight to the LM 2044s despite slightly lower ratings. In general, it is difficult to get index exposure to 20- to 30-year ‘A’ credit in non-bank financials, particularly with a G-spread well north of 150 bp. ‘A’ credit has an attractive current pick relative to ‘AA’ names within the same sector, a trend that began to peak last month. But the relationship still stands at historically wide levels, offering opportunity to index investors.
Exhibit 1. Broker/Asset Manager/Exchanges – Single ‘A’ or better (LM and BEN curves in white and blue, respectively)
Source: Santander US Capital Markets, Bloomberg/TRACE BVAL G-spread indications
3 million+ LM 05.625% 01/15/44 @ 170/20yr, G+172, 5.94%, $96.24
Issuer: Legg Mason Inc. (LM)
Unconditionally and irrevocably guaranteed by Franklin Resources (BEN)
Amount Outstanding: $550 million
LM was purchased by BEN for $5.9 billion in a deal that closed in August of 2020. At the time of the closing, BEN assumed all debt obligations of LM but kept the legacy LM ticker on all remaining debt issues outstanding. Roughly a year later BEN unconditionally and irrevocably guaranteed the debt. Moody’s upgraded the LM debt to be in-line with the parent company in August of 2021, citing the new guarantee. S&P had already aligned the ratings of LM with the parent company just before the closing of the transaction, citing that the acquired operations would be integral to BEN’s future strategy.
BEN is one of the largest public asset managers in the world with Assets Under Management (AUM) of $1.4 trillion as of first calendar quarter of 2023. The company boasts a large-scale, well-diversified operating platform. Management maintains a conservative balance sheet reflective of its mid-A ratings profile. The company makes frequent acquisitions to propel its growth strategy, with recent emphasis in alternative asset categories (currently around 18% of investments). Most recently, BEN purchased Putnam Investments LLC from Great-West Lifeco for $924 million in a deal that closed in May and will contribute significantly to AUM in the next quarter.
BEN last reported fiscal second quarter earnings back on May 1. The company recorded adjusted EPS of $0.61, which was down 36% year-over-year but came in significantly ahead of the consensus estimate. A better than expected top-line performance helped offset higher than anticipated operating expenses in the quarter. Net outflows from AUM were down significantly from the prior year period and beat expectations at $8 billion for the quarter.
BEN has a stable liquidity profile with over $4 billion in cash on the balance sheet as of year-end 2022 plus nearly $10 billion in short and long-term investments. The company has $500 million available on its revolving credit facility through the current year, with $2.675 billion outstanding on a revolver through next year. BEN’s last trip to the public debt market was in August 2021 when the company brought $450 million to help pre-fund upcoming maturities, which specifically included the LM 2024 notes. BEN might seek to issue debt in the relatively near-term. After the $250 million due next year, BEN has $400 million maturing in 2025 and $450 million due in 2026.
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