Moody’s cuts outlook for BlackRock (BLK) on debt concerns

Black RockBLK’s outlook was downgraded to negative from stable by Moody’s Investors Service. The move followed the company’s announcement that it would acquire Preqin for almost $3.2bn (£2.55bn) in cash, its second major deal.

In addition, the rating agency affirmed the senior Aa3 senior unsecured ratings of BlackRock and its subsidiary BlackRock Funding, Inc. In addition, the company’s long-term and short-term issuer ratings were affirmed at Aa3 and P-1, respectively.

Reasons for Outlook Rating Downgrade

The change in BlackRock’s rating outlook to negative is attributed to the significant size and scope of two significant acquisitions announced in a short period of time. In addition to the recently disclosed Preqin buyout, which will be funded with new debt, BlackRock Funding has already secured debt to fund the $3.0 billion cash component of the $12 billion acquisition of Global Infrastructure Partners (“GIP”). This GIP transaction is expected to close this year.

These acquisitions are expected to increase BlackRock’s adjusted debt by more than $6 billion, reaching approximately $14.7 billion. As a result, the company’s leverage ratio is expected to rise to between 1.6 and 1.7, slightly above Moody’s leverage-related downgrade factor of 1.5.

While Moody’s expects BlackRock’s leverage ratio to eventually fall below 1.5, this is unlikely to happen within the next 12 months.

The immediate financial benefit to Preqin is expected to be minimal, with projected revenue of $240 million in 2024, or about 1% of BlackRock’s total revenue. The acquisition is fueled by projected growth, as Preqin’s revenue has been growing at a compound annual rate of about 20% in recent years.

Preqin, a leading provider of private markets data, aligns well with BlackRock’s evolving strategy to become an investment services software platform. The integration is expected to generate revenue synergies as BLK combines Preqin 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 could 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 supporting their growth. There is concern that the simultaneous absorption of two large acquisitions could strain BlackRock’s management resources, despite its strong history of large acquisitions.

Factors influencing future ratings

For BlackRock to maintain its current rating, it must demonstrate success in accelerating technology-driven revenue growth, increasing investment advisory fees and alternative management performance, and reducing its leverage multiple. Conversely, failure to advance acquisition targets and reduce leverage could result in a rating downgrade.

Given the negative outlook, an upgrade is unlikely in the near future.

Our approach

As Moody’s has indicated, BlackRock has ample experience integrating large transactions. As such, we believe that once the Preqin and GIP acquisitions are complete and the company starts generating synergies, the high debt burden will not be a major concern.

Over the past year, BlackRock shares have risen 13.7%, lagging the industry’s 26.3% gain.

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Currently, BLK has a Zacks Rank of #3 (Hold). You can see complete list of today’s Zacks #1 Rank stocks here.

Moody’s Rating Actions on Other Financial Firms

Last month, Bank OZKOZK’s ratings and outlook have been affirmed by Moody’s Ratings. The decision underscores the balance between the bank’s strong financial metrics and the risks associated with its significant exposure to commercial real estate (CRE) loans.

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

Next, Related Banc-CorpASB’s outlook was affirmed as stable by Moody’s. The rating agency also affirmed the company’s Baa3 standalone underlying credit rating. In addition, the company’s Baa3 issuer rating on long-term senior unsecured bonds remained unchanged.

Moody’s believes that the affirmation of ASB’s ratings reflects a balance between the credit issues arising from a significantly concentrated commercial real estate loan portfolio and the qualitative and quantitative risk mitigating factors that offset them.

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