Standard & Poor’s Rating Services lowered its long-term counterparty credit and senior debt ratings on Amvescap plc, owner of the AIM and Trimark funds in Canada, following the announcement of its large settlement with U.S. authorities.

The firm‘s Invesco Funds Group and AIM Advisors Inc. subsidiaries have agreed pay more than US$450 million in penalties, restitution and lowered fees in deals with the attorneys general of Colorado and New York and the staff of the U.S. Securities and Exchange Commission to settle allegations they allowed wealthy investors to trade their mutual funds improperly. The agreements also commit the companies to a range of corporate governance reforms.

“We deeply regret the harm done to fund investors and have taken strong measures to prevent any recurrence,” said Charles Brady, executive chairman of Amvescap. “Our fundamental commitment has been — and must continue to be — to uphold our clients’ trust by putting their interests first. It has been painful for Amvescap employees at all levels to learn that these core values were not always upheld, impacting our customers and damaging the reputation of our company. With these agreements, we rededicate our firm to maintaining the highest ethical standards as we focus on delivering strong investment performance to our clients around the world.”

In addition to the corporate governance changes to be adopted as part of the regulatory agreement, it has initiated changes across operations to help ensure it puts clients’ interests first in all activities. These measures include those recommended by IFIC earlier this year: strengthened daily monitoring of trading activities, a 2% redemption fee on some funds to deter short-term trading, and an enhanced fair value pricing policy.

An independent consultant will be retained to oversee the distribution of the restoration fund amounts to mutual fund shareholders. Amvescap says it intends to pursue legal action
against third parties who facilitated late trading or any other illegal activity.

Nevertheless, S&P says the outlook on the firm remains negative. The rating agency says the downgrade reflects pressure on Amvescap’s revenue stream and cash flow as a result of the net outflow of funds during the past few years, and the settlements were greater than it had expected, stressing the company’s financial measures beyond the current ratings level.

The pending settlements will curtail some of the firm’s financial flexibility, it says, as Amvescap will need to finance a portion of the payments, either using its existing credit facility or tapping the capital markets.

“During the past several years, volatile equity markets have caused meaningful market depreciation, which, combined with large scale redemptions in the company’s mutual funds, has put downward pressure on the firm’s assets under management and ultimately on the revenue stream,” S&P says. It also warns that Amvescap’s interest coverage ratio is expected to come under pressure in the short run due to the large regulatory settlement payments.

“The negative outlook reflects the expectation that Amvescap will be challenged to stabilize its revenue stream if the company’s subsidiaries continue to experience net outflow of funds. Nevertheless, if the company sees growth in assets under management, due to net inflow of funds and market appreciation, combined with a reduced expense base and lower debt service requirements, a revision of the outlook to stable may be warranted,” it concludes.