A Glance at AMP’s stance as S&P degrades its rating

Summary

  • Credit rating from a reputed rating agency assists investors to make sound decision while investing in a stock, prompting corporates to hire rating agencies such as Standards and Poor’s, Moody’s, and Fitch to rate their debt.
  • S&P recently downgraded its ratings for AMP Limited and AMP Group Holdings Limited from BBB+ to BBB, which the Company claims to be associated with the completion of the sale of AMP Life Limited for A$3.0 billion to Resolution Life.
  • AMP aims to use proceeds from the sale to facilitate execution of its corporate strategy, on priority.

Ratings from a reputed rating agency add a lot of value for investors while making investment decision, in terms of investing in a stock. If you are wondering why, the reason is they publish ratings that represent the creditworthiness of a company or debt securities.

Ratings are provided to large bond issuers, entities, or individuals. The ratings are used in asset-backed securities, mortgage-backed securities, and collateralised debt obligations. A high credit rating facilitates easy borrowing at a lower interest rate from public debt market or lending institutions. A low credit rating fetches high interest rate.

Corporates hire rating agencies such as Standards and Poor’s, Moody’s, and Fitch for rating their debt as investors rely on ratings to make an informed decision on whether to invest or not invest in a bond. Ratings received from international agencies over financial intermediaries and underwriters as they are deemed reliable and accurate for evaluating on data which are not available to public in general.

On that backdrop, let us cast an eye on AMP Limited; its rating recently got devalued by S&P.

S&P lowers ratings on AMP Limited and AMP Group Holdings Limited

On 13 July 2020, AMP communicated that Standard & Poor’s had lowered AMP Group Holdings Limited and the Company’s rating from BBB+ to BBB. It further revealed that all the companies that come under AMP Group continue to be on CreditWatch with negative implications.

The change in rating is associated with the completion of the sale of AMP Life Limited that closed on 30 June 2020. Also, AMP bank still holds the BBB+ rating

AMP highlighted its strong cash position backed by robust balance sheet and capital position, which is Level 3 eligible capital more than minimum regulatory requirements of A$2.5 billion capital at 31 December 2019.

AMP completes sale of life insurance business to Resolution Life

In the beginning of July, AMP notified on the conclusion of the sale of AMP Life, its life insurance business for A$3.0 billion to Resolution Life as part of AMP’s transformation strategy.

The sale proceeds include payment of A$2.5 billion cash and A$500 million equity interest in Resolution Life Australia, a new Australian-based, Resolution Life-controlled holding entity.

The net proceeds from the deal will increase AMP’s capital beyond target surplus by ~A$1.1 billion, after making post completion adjustments.

As a priority, AMP intends to use any capital above target surplus after finalising the sale, proceeds from the sale would be utilised to fund the execution its new AMP strategy. Post this, AMP intends to assess its capital management options in total to return the excess beyond target surplus to stakeholders. However, the stakeholders return is subjected to unforeseen circumstances and current economic and business conditions.

The sale of AMP Life will redefine AMP’s group structure. The internal split-up process included the handover of ~A$55 billion of client funds through various successor fund transfers, which represents one of the largest fund transfers and allows AMP to emphasise on its strategic simplification involving its wealth management platforms and products.

Further to its residual 20% holding in Resolution Life Australia, AMP is expected to continue to deliver technology and administrative services to AMP Life as a transitional services agreement for two years. Customers’ terms and conditions is expected to remain unchanged throughout the spilt-out process.

According to AMP Chief Executive Francesco De Ferrari, the sale of the Life business is an introductory step towards the Group’s strategic transformation to evolve as a simpler, client- directed and growth-focused organisation. Mr. Ferrari further said that the sale of AMP is considered as a major milestone that demonstrates AMP’s ability to perform complex projects even during the difficulties of COVID-19.

Mr. Ferrari also said that the sale of AMP life is a historic moment as AMP stops being a life insurer after 170 years. He said that the Life team will move to Resolution Life and would continue to serve and support existing clients without any changes to their policy terms or conditions.

Mr. Ferrari expressed his pleasantry by highlighting Resolution Life as an experienced operator and that by selling AMP to Resolution has created an outcome that is in the best interests of AMP’s clients, policy holders and shareholders.

On 23 June 2020, the Company announced dividend payment amount of A$0.99820 per security for dividend/distribution related to the quarter ending September 21, 2020, to be paid on September 22, 2020.

AMP was trading at A$1.740 on 15 July 2020, down by 0.287% (at AEST 2:00 PM). The Company experienced a low of A$1.110 on 24 March 2020 after reaching a high of A$2.080 on 19 February 2020. Since hitting March’s low, AMP’s price has increased by 57%, as on 14 July 2020.


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