Fitch Affirms Marex at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed Marex Group Plc's Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.

Fitch has also affirmed Marex's long-term senior unsecured debt rating at 'BBB-'.

Key Rating Drivers

Strong Earnings; Growing Franchise: Marex's Long-Term IDR reflects its strong earnings across recent variable market conditions, the growth in its franchise since the now fully integrated acquisition of ED&F Man Capital Markets Limited and its adequate buffer over regulatory capital requirements. The IDR also considers the increasing risk management demands of a progressively more complex business and the need to maintain a robust liquidity profile while managing a structured notes business as well as wholesale funding lines.

On 25 April 2024, Marex's shares commenced trading on Nasdaq at a price giving an implied company valuation of about USD1.4 billion, although the majority of shares remain held by private Jersey-registered companies.

Specialist Market Segments: Marex provides clearing, agency and execution, market-making and hedging and investment solutions services across global energy, commodity and financial markets. Its particular strengths are in a range of specialist segments where wider margins compensate for the smaller volumes conducted in comparison with more mainstream securities firms.

In recent years, the company has grown both organically and via bolt-on acquisitions, and its increased scale helps to attract clients who require counterparties with sound capitalisation, representation in multiple jurisdictions and membership of a wide range of market exchanges.

Revenues Bolstered by Acquisitions: Marex reported USD1,245 million in revenue in 2023, representing an increase of USD711 million from 2022. Fitch's benchmark ratio for earnings and profitability (operating profit/average equity) materially improved to 28% from 18%. This reflected principally the first full year contribution from the ED&F Man business (acquired in 2H22) in addition to organic volume growth and the positive effect of higher rates on interest income from cash balances held for liquidity.

Adequate Regulatory Capital Headroom: Marex is regulated by the Financial Conduct Authority in the UK, as well as by other authorities in its relevant geographical markets. It remained comfortably in compliance with capital requirements at end-2023, with a total capital ratio under the Investment Firms Prudential Regime of 229% (end-2022: 266%), the decrease reflecting the growth in client activity and in Marex's balance sheet during the year.

Fitch also monitors securities firms' leverage by reference to the ratio of tangible assets (adjusted where relevant for reverse repos and securities borrowed) to tangible equity, which it calculates was 14.4x at end-2023, compared with 9.3x at end-2022 (restated). Growth was principally in lower-risk assets, and has been mitigated since year-end by the net capital increase of about USD70 million resulting from the recent Nasdaq listing. This will have raised the total capital ratio in the near term, but Fitch expects the additional equity to be deployed in supporting further growth in the business.

Well-Managed Liquidity: Liquidity management is central to Marex's business and, in addition to cash retained on hand, the company maintains a buffer of unencumbered US Treasurys and access, at group level, to a USD150 million revolving credit facility. The company also undertakes a range of severe, but plausible, stress tests to ensure headroom on all foreseeable cash needs.

Sound Risk Management Record: Marex's activities are principally client-driven as opposed to seeking market positions for its own account. Client exposures are managed via regularly reviewed limits, margining procedures and defined risk appetite statements per business activity. Historically, Marex has had few material losses, but the expansion of its business enhances diversification and increases the sophistication of the associated risk management framework required. Fitch views positively the increased governance and reporting requirements stemming from the company's recent listing.

RATING SENSITIVITIES

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

A reduction in regulatory total capital ratio below 200% on a sustained basis, either via leveraged growth or through a material erosion of capital. The latter could, for instance, stem from a material operational or credit loss, significant asset impairment or other unexpected event.

Signs of deficiencies in Marex's liquidity management framework.

Evidence of a material increase in risk appetite, for example via significant increases in credit limits for lower-rated counterparties, relaxation of hedging policies or a less granular stress-testing framework, in addition to more aggressive capital management.

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

Continued diversification of Marex's franchise, while maintaining robust regulatory capital buffers and an operating profit/average equity ratio consistently above 15%, thereby strengthening perception of the resilience of Marex's internal capital generation.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The senior unsecured notes are rated in line with Marex's Long-Term IDR as Fitch views the probability of default as materially the same and expects average recoveries, in the absence of substantial higher or lower-ranking debt.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The senior unsecured notes' rating is primarily sensitive to changes in Marex's IDR, with which it is equalised. Significant changes to the notes' recovery prospects, for example due to the issuance of material higher- or lower-ranking secured or subordinated debt, could lead Fitch to notch the notes' rating up or down from the Long-Term IDR.

ADJUSTMENTS

The earnings and profitability score has been assigned below the implied score due to the following adjustment reason(s): portfolio risk (negative).

The capitalisation and leverage score has been assigned above the implied score due to the following adjustment reason(s): regulatory or other complementary capitalisation ratios (positive).

The funding, liquidity and cover score has been assigned above the implied score due to the following adjustment reason(s): business model/market convention (positive).

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.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.