Fitch Ratings says Clearstream Banking SA's (Clearstream) Long-Term Issuer Default Rating (IDR) of 'AA' with Stable Outlook and its Viability Rating (VR) of 'aa' are unaffected by Deutsche Boerse AG's (DBG) intention to acquire SimCorp A/S (SimCorp).

At the same time, Fitch has placed Clearstream's Shareholder Support Rating (SSR) of 'aa-' on Rating Watch Negative (RWN).

The rating action follows parent DBG's plan to make an all-cash voluntary offer to acquire all of the shares (excluding treasury shares) in SimCorp, a Danish-based investment management software platform, for EUR3.9 billion. The acquisition will mainly be debt-funded, initially via committed bridge financing and then through the issuance of around EUR3 billion in long-term senior debt, with the remaining EUR0.9 billion sourced from available cash and short-term commercial paper.

The RWN on Clearstream's SSR reflects a potential weakening of DBG's ability to support Clearstream due to its acquisition of SimCorp increasing its debt materially. However, this will not affect Clearstream's IDR of 'AA' as it is driven by its standalone creditworthiness.

Key Rating Drivers

Strong Standalone Credit Profile: The ratings reflect Clearstream's market-leading position in the international post-trade securities services industry, with strong capabilities in settlement, custody and collateral management. The ratings also recognise its scalable business model, conservative risk appetite, supported by strong operational capabilities, and robust financial profile, benefitting in particular from an inherently low exposure to credit risk.

Higher Leverage Post-Acquisition: The RWN on Clearstream's SSR reflects pressures on DBG's credit profile from potentially higher leverage following SimCorp's acquisition, and consequently incrementally weaker ability to support Clearstream. Our assessment of Clearstream's relevance for the broader DBG franchise and high propensity to support the subsidiary remains unchanged. We believe parental support is extremely likely given Clearstream's integral position within the wider DBG's franchise.

Medium-Term Deleveraging: The completion of the deal is subject to various regulatory approvals and a minimum acceptance threshold of 50% plus one share. If the acceptance level is close to 100%, which we view as likely given the premium of 39% over the closing price of SimCorp's share on 26 April, DBG's pro-forma gross debt/EBITDA ratio might increase to around 2.5x post-acquisition from around 1.6x at end-2022 before reducing to around 2.2x at end-2024 on improving EBITDA generation.

As a result, DBG's leverage will remain at the lower end of Fitch's 'a' range for financial market infrastructure companies (1.0x to 2.5x) for an extended period. This weighs on our view of DBG's credit profile and could result in a one notch lower SSR for Clearstream if the offer is successful.

Improved Revenue Diversification: The acquisition of SimCorp and the announced transformation of the data and analytics segment into investment management solutions with a merger of ISS and Qontigo will according to management result in DBG's pro-forma EBITDA increasing by around EUR200 million and additional synergies of EUR90 million being realised by 2024. This will further strengthen DBG's franchise in the asset management solutions segment and improve its revenue diversification as well as the share of recurring as opposed to volume-driven revenue.

However, this is not likely to materially change our business profile and earnings assessment of DBG as the incremental increase in EBITDA will only be modest while revenue diversification is already strong.

IDRs Unaffected: A downgrade of SSR by a notch would not affect Clearstream's VR and IDRs as Fitch can rate bank subsidiaries higher than its parent, provided integration and contagion risks are limited.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Fitch plans to resolve the RWN on completion of the acquisition, likely in 3Q23, when there will be clarity on acceptance level and DBG's leverage trajectory.

Clearstream's SSR could be downgraded by one notch on a sustained increase in DBG's gross debt/pro forma EBITDA to materially above 2.0x, in particular if the ratio remains above this level for an extended period.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Clearstream's SSR could be affirmed if the acquisition does not proceed and DBG's leverage profile remains broadly unchanged. The SSR could also be affirmed if the increase in DBG's leverage is less than we expect, for instance due to only partial acquisition of SimCorp, and if there is a clear path to deleveraging to comfortably below 2.0x gross debt/EBITDA within the next 12-18 months.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

Clearstream's SSR (but not its IDRs) is driven by potential support from DBG.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

Clearstream Banking SA

Shareholder Support

aa-

Rating Watch On

aa-

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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