Nuveen’s $13.5bn (£9.9bn) acquisition of Schroders is set to have a negative credit impact on the $1.4tn US asset manager and its parent company, the Teachers Insurance and Annuity Association of America (TIAA), Moody’s has warned. 

The deal – which is the largest ever acquisition of a European asset manager – was announced earlier this week to the surprise of the City. It creates a private markets franchise worth $414bn, with around 17 per cent of combined assets allocated to private markets, according to the London Stock Exchange Group.

However, Moody’s has downgraded its outlook for both the TIAA and Nuveen from ‘stable’ to ‘negative’, citing the anticipated credit impact of the acquisition. 

The ratings agency said the TIAA downgrade reflects anticipated weakening of its financial profile, resulting from the high cost to finance the acquisition. This will increase leverage, reduce capital adequacy, and heightens execution and integration risk associated with the transaction, it said. 

Moody’s also noted that “despite the complementary nature of the European asset management target and its potential to bolster Nuveen’s market position and earnings diversification, the acquisition lies outside TIAA’s core higher education pension business”, which is another factor in its decision to revise down the outlook.

Meanwhile, the outlook for Nuveen has been downgraded on the basis that it will issue “a significant amount of debt to finance this acquisition, which will increase leverage and constrain profitability.” 

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Despite the revisions, Moody’s acknowledged that the transaction aligns with TIAA’s and Nuveen’s strategic objective of becoming a global multi-asset manager with industry-leading public and private market platforms.

It cited Schroders’ $170bn wealth management franchise, which Moody’s said “provides a valuable and typically stickier European distribution channel”, while its alternatives platform, with about $100bn in assets under management, “further deepens Nuveen’s private markets capabilities”.

Rokhaya Cisse, vice president, financial institutions group at Moody’s Ratings, said the acquisition highlights the “growing importance of scale and diversity in driving growth in the asset management sector”.

“While the transaction will enhance Nuveen’s competitive position, the rating outlook was revised to negative from stable, reflecting the financing package which will increase leverage and pressure profitability,” Cisse added.

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“Nuveen’s acquisition of Schroders is transformational, with combined assets approaching $2.5tn, it will materially strengthen Nuveen’s competitive position and advances TIAA’s growth strategy,” said Bob Garofalo, vice president, financial institutions group at Moody’s Ratings.

“While profitability should benefit over time from a more diversified earnings base, the outlook was changed to negative due to the expected strain on TIAA’s financial profile from the high cost of financing the acquisition.”