Fitch Affirms Legg Mason's IDR at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed Legg Mason's (LM) long-term Issuer Default Rating (IDR) at 'BBB+'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

LM's IDR reflects its strong franchise, extensive scale as an institutional asset manager and improving earnings. Debt service and leverage metrics are suitable for a company at this rating level. Constraining factors include LM's sensitivity to external market trends and fund outflows resulting from weak investment performance in the 2007-2008 timeframe.

LM has reduced debt substantially over the past year. In July of 2009, LM conducted a voluntary conversion of roughly $1 billion of mandatory convertible senior debt to equity, and in January 2010 repaid a $550 million term loan. As a result of the reduction in debt levels and pro forma interest expense, leverage and debt service metrics should improve over the next year and remain solidly within the range appropriate for a company in this rating category.

During 2008, LM increased its total debt level above $3 billion in order to give management enough cash reserves to absorb losses in distressed Structured Investment Vehicles (SIVs) held by sponsored money market funds. With the SIV problems now fully resolved, management has redeployed cash and paid down debt. Fitch estimates that cash available for corporate purposes, ie, not necessary for subsidiary working capital and regulatory needs, is approximately $980 million after the January debt repayment. Fitch believes this level provides sufficient flexibility to deal with unexpected cash needs.

As did other investment managers, LM experienced declining revenues in calendar year 2009 due to declining assets under management (AUM) levels, stemming in part from the overall market decline but also from weak investment performance in high-profile funds. Client outflows resumed in the most recent quarter (ended Dec. 31, 2009), despite stable market conditions. LM's investment affiliates have made progress in improving investment performance, particularly over the one-year time horizon, but will likely need to establish a longer period of good performance in order to improve fund flows.

LM could face performance pressure in the current environment, particularly if equity markets decline or if client outflows accelerate. However, Fitch believes that the reduction in debt levels and interest expense should enable the company to withstand a stress scenario at its current rating level. Consequently, the Rating Outlook remains Stable.

Fitch has affirmed the following ratings with a Stable Outlook:

Legg Mason Inc.

--Long-term IDR at 'BBB+';

--Long-term debt at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

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