The AMP Limited (ASX: AMP) share price could face pressure this morning after it suffered a credit rating downgrade.
The embattled wealth manager announced after the market closed yesterday that Standard and Poor's (S&P) cut its rating on the listed entity, AMP Group Holdings Limited and AMP Bank by one notch each.
The setback threatens to derail the bounce in the share price as AMP tries to recover from its cultural and governance scandal. Should investors be worried?
AMP share price pressured by governance concerns
The downgrade was made worse by comments from S&P on the reasons behind the downgrade. The agency said that recent developments made it think that AMP's governance was not "as strong as we previously considered", reported the Australian Financial Review.
The trigger for S&P was the string of quick exits by senior managers and last week's strategic review of group assets. AMP's newly installed chair Debra Hazelton overrode the group's also relatively new chief executive Francesco De Ferrari's turnaround strategy.
Talk about a tense work environment! This isn't something that would inspire confidence at a time when AMP badly needs to get back on its feet.
Credit vs. equity risks
But this latest development has not derailed my "buy" thesis on the stock. There are a few reasons for this.
Firstly, S&P is a credit agency. They advise debt investors on how safe it is to lend money to a company and they way they analyse a corporation is different from the way equities analysts would.
Credit analysts are particularly focused on default risks and downside scenarios. They don't care as much about how much profit growth is achievable or sum-of-parts valuations. They want to be assured that the company can pay their debts as opposed to how much money it can make.
What this means is that a ratings downgrade by S&P or other credit agencies is less correlated to share price performance than a downgrade coming from a broker, for instance.
Downgrade doesn't reflect AMP valuation
I am not saying credit and equity aren't linked, but credit ratings aren't driven by how much potential upside or downside there is in a share price.
This takes me to the second point. The reason why I think the risk-reward is looking attractive for AMP is because I think there's intrinsic value in the business.
Risk-reward still looking attractive
No one will argue there is significant execution risk in the business. Management will need to learn to sing from the same song sheet at a time when the future of 170-year plus institution is at stake.
But what brings me some comfort is the belief that if AMP was carved up and sold off in pieces, the sales will fetch a higher price than where the stock is currently trading.
This is good news for equity investors, but could be a real headache for credit investors.
