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Cowen Inc. -- Moody's assigns Ba3 Corporate Family Rating to Cowen Inc., B1 senior secured loan rating

·15 min read

Rating Action: Moody's assigns Ba3 Corporate Family Rating to Cowen Inc., B1 senior secured loan ratingGlobal Credit Research - 03 Mar 2021New York, March 03, 2021 -- Moody's Investors Service, (Moody's) has assigned a Ba3 Corporate Family Rating (CFR) to Cowen Inc. (Cowen) and a B1 Senior Secured Term Loan rating. The rating assignment follows Cowen's announcement of its proposed $300 million senior secured term loan. Moody's said Cowen's outlook is stable.The following ratings were assigned:Issuer: Cowen Inc.Corporate Family Rating, Assigned Ba3$300 million senior secured term loan, Assigned B1$25 million senior secured revolving credit facility, Assigned B1 Outlook actions: Issuer: Cowen Inc. Outlook, Assigned Stable RATINGS RATIONALE Moody's said Cowen's financial profile is supported by a strong yet niche capital markets franchise in underwriting, brokerage, advisory and investment management in the key sectors it serves. In particular, said Moody's, Cowen's healthcare sector activities provide it with a core differentiating strength, especially in the current pandemic environment and considering the ongoing increased emphasis on innovation in the sector, that can drive capital markets activity.In early 2020, a slowdown in global M&A activity resulted in lower advisory revenue, while declining financial markets pressured Cowen's investment income. This was partially offset by a rise in the firm's institutional brokerage revenue which benefitted from increase client trading activity. After the weaker performance in the first quarter of 2020, Cowen had a very strong remainder of the year, benefiting from a rebound in global M&A activity, which set the stage for a strong start to 2021. In 2020, Cowen also benefited from strong underwriting revenue following the improvement in market liquidity and overall client demand.Cowen's institutional brokerage and principal trading businesses are supported by prudent risk management policies and the oversight of an experienced management team. However, the firm is operating in highly competitive businesses, which introduces credit challenges, particularly for smaller firms such as Cowen, said Moody's. In facing these competitive challenges, Cowen and its peers retain employee talent through attractive compensation, while investing in technology and systems to bolster their brokerage and other capital markets platforms. Competition within the brokerage business has mostly been driven by the rise of electronically-driven market makers, whose ability to execute trades electronically and through alternative trading systems pressures trading commissions and spreads for all market makers.The firm may opportunistically, but rarely, participate in its clients' offerings. Although exposure to these investments has a low cost basis, unrealized gains and losses from these merchant banking exposures can result in significant fluctuations in periodic revenue. In addition, Cowen retains certain large concentrated investment positions, reported within its Asset Company business segment, which could result in large outsized mark-to-market losses, particularly in a stressed environment. Moody's said such losses could erode capital at a time when it is needed most.Cowen's stable outlook reflects its improved capital and liquidity position, and incorporates Moody's expectation of potential revenue variability (stemming from fair value marks on Cowen's investments) and the possibility of reduced revenue once the pandemic subsides.The proposed senior secured loan issued by Cowen Inc. (the group holding company) has been assigned a B1 rating. This is one notch below Cowen's Ba3 corporate family rating, because obligations at the holding company are structurally subordinated to Cowen's operating companies, where the preponderance of the group's debt and debt-like obligations reside. Cowen plans on using the net proceeds from its proposed $300 million senior secured term loan to repay some of its existing debt and retain as cash on-hand the excess net proceeds for general corporate purposes.Governance is highly relevant for Cowen, as it is to all firms that participate in the financial services industry. Corporate governance weaknesses can lead to a deterioration in a company's credit quality, while governance strengths can benefit its credit profile. Governance risks are largely internal rather than externally driven, and for Cowen we do not have any particular governance concerns. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSCowen's ratings could be upgraded should its revenue growth become accentuated towards more stable and less capital intensive streams; grow profitability in its core revenue lines (excluding incentive fees and investment income), resulting in lower pretax earnings volatility; increase its scale via developing a more diversified investment banking platform; and further improve its funding profile through growth and equity retention.Cowen's ratings could be downgraded should it suffer a significant reduction in revenue, either due to idiosyncratic events or a deterioration in the economic environment, not offset by a reduction in expenses (particularly employee compensation); if it experiences a risk control failure or a deterioration in liquidity; or if it demonstrates a material increase in risk appetite, such as a more aggressive stance in merchant banking.The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Fadi Abdel Massih Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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