Legg Mason Restructures Debt to Fortify Capital Structure - Analyst Blog

Global asset manager Legg Mason Inc. LM restructured its debt capital portfolio in an effort to strengthen the capital structure. The company has priced the public offering of senior notes worth $650 million and will redeem some senior notes due in 2019. The offering is expected to close on Jun 26, 2014 while the redemption will take place on Jul 23, 2014.

Joint book-running managers for the offering include J.P. Morgan Securities LLC, an arm of JPMorgan Chase & Co. JPM, while senior co-managers include Goldman, Sachs & Co., the subsidiary of The Goldman Sachs Group, Inc. GS, and Morgan Stanley & Co. LLC – an arm of Morgan Stanley MS.

The Restructuring

Legg Mason stated that it has priced senior notes due 2019 of $250 million, senior notes due 2024 of $250 million with an offering of an additional $150 million 5.625% senior notes due 2044. The senior notes due 2019 and 2024 will carry an annual interest of 2.700% and 3.950%, respectively. The company will make interest payment on the senior notes due 2019 and senior notes due 2024 on a semi-annual basis. Such payments will be made on Jul 15 and Jan 15 of each year, beginning Jan 15, 2015. The company also issued senior notes due 2044 were issued at a premium of 106.519%.

On the redemption front, Legg Mason has forwarded the notice of redemption to the holders of its outstanding 5.500% senior notes due 2019.

The Expected Benefits

Legg Mason intends to utilize net proceeds from the offering for repayment of its existing 2019 notes worth $650 million.

The company expects to incur costs of around $105–$110 million, owing to the call premium and charges related to the redemption. However, owing to these moves, the company anticipates to record interest rate savings of more than $10 million in the upcoming 12 months. Notably, the related debt restructuring costs are expected to be offset by additional annual interest savings during the life of the new debt.

Legg Mason intends to capitalize on the current positive debt markets to boost its long-term debt portfolio. It aims to improve its credit profile by ensuring lower rates and longer maturities, minimizing refinancing risk in 2019 and strengthening its overall capital structure.  Further, the company stated that it is well positioned to carry on its share repurchase program and make strategic investments including acquisitions.

Bottom Line

Legg Mason exhibits decent fundamentals amid a competitive environment in the industry. The company's organic growth strategy regained momentum as it witnessed overall inflows in assets under management (:AUM) in fiscal 2014 after experiencing outflows in the past couple of years.

Further, it aims to grow through core operations while streamlining the business by divesting non-core operations.

Legg Mason currently carries a Zacks Rank #3 (Hold).