Impact on Credit Ratings of AMP’s Large Loss and Business Overhaul

AMP reported a $2.3 billion loss for the six-months ending 30 June 2019 driven by a $2.35 billion non-cash impairment charge which addresses legacy issues in its wealth division and AMP Life. AMP also posted a net cash outflow of $3.1 billion of funds during the first-half. Some outflows were expected given the terrible publicity AMP has suffered as a result of the Hayne royal commission which exposed many poor practices at AMP’s wealth advisory and superannuation businesses over several years.  AMP’s stock price has lost almost 70% of its value in the past 18 months following the uncovering of systemic misconduct at the organisation.

As part of AMP’s attempt to overhaul its business, AMP sold its life insurance business in early August to the UK’s Resolution Life in a revised deal worth a reduced $3 billion.  In mid-July, this deal fell through as the Reserve Bank of New Zealand would not provide regulatory approval for the $3.3 billion deal unless Resolute Life agreed to hold separate “ring-fenced” assets in New Zealand for the benefit of policyholders in New Zealand.   Under the revised deal, AMP will receive $2.5 billion in cash and a $500 million stake in Resolution Australia (a new Australian-domiciled, Resolution Life-controlled) holding company that own AMP Life.

AMP also recently completed a $650 million capital raising via new shares issued to institutional investors.  This capital raising, together with the sale of AMP Life to Resolution Life for $3 billion, will help AMP immediately implement its three-year “transformational strategy to create a simpler, higher-growth and higher-return AMP that’s focused on customers” according to AMP’s CEO. AMP’s new strategy seeks to grow its AMP Bank and AMP Capital divisions, while shrinking its Wealth division.

At this stage, AMP’s “A-” credit ratings remains on negative watch and so far S&P has not reacted to the latest developments. Overall Amicus believes the events above are credit positive for AMP in the short-term; however risks are high surrounding the implementation of AMP’s “transformational strategy”.

When S&P placed AMP on negative watch in March 2019 it said it expected to resolve the issue by the third quarter “prior to or after the settlement date” of the sale of the life insurance business and when S&P “gains greater clarity on the credit quality and financing structure of the remaining wealth and asset management operations”. S&P warned the impact was likely to be a reduction in credit rating of “one or two notches”.

AMP Bank benefits from a two notch uplift in its S&P rating due to support from the AMP Group. Therefore if the remaining group entities are downgraded, it will logically follow they will no longer be able to provide the same level of support to AMP Bank. We therefore caution investors to expect AMP Bank to be downgraded from A- to either BBB+ or BBB in the next one to two months when S&P completes its review. Overall the news since S&P started its review in March has been largely negative being announcement of a large impairment charge, ongoing deterioration in the Wealth business, further falls in the share price and the life business being sold for less than initially expected; although this has been somewhat offset by the capital raising, suspension of the dividend and the “clearing of the decks” by management who can now proceed to implement their “transformational strategy”.

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