S&P raises Fortress Investment Group rating to 'BBB'

Tue Oct 9, 2012 11:57am EDT

Overview
     -- New York-based alternative asset management company Fortress 
Investment Group continues to grow its assets under management,
increasing its stable and recurring management fee earnings.
     -- We are raising our counterparty credit rating on Fortress to 'BBB' 
from 'BBB-'.
     -- The outlook is stable, reflecting our expectation for sound cash 
generation and investment performance. 

Rating Action
On Oct. 9, 2012, Standard & Poor's Ratings Services raised its long-term 
counterparty credit rating on FIG LLC to 'BBB' from 'BBB-'. The outlook is 
stable. FIG LLC is the counterparty to Fortress' funding agreements and 
guaranteed by various Fortress group entities. Accordingly, we analyze the 
entire Fortress Investment Group to arrive at our rating on FIG LLC.

Rationale
The upgrade primarily reflects our view that the firm is focusing on 
increasing its fee-paying assets under management (AUM), which reduces the 
dependence on incentive income over time. Our rating on Fortress reflects the 
firm's increasing stable and recurring management fee income from its 
private-equity and credit funds. Other rating strengths include low leverage, 
a continually improving funding profile, a sound long-term investment track 
record, and experienced principals. Internal controls, infrastructure, and 
governance practices are sound. We estimate that EBITDA interest coverage for 
the year will strengthen to about 10x and debt leverage will decline to about 
0.6x.

The active role of the firm's five principals, who manage independent 
investment strategies and control the majority of the voting shares in the 
company, is a factor offsetting Fortress' strengths because it amplifies 
key-man risk. We see the illiquidity of Fortress' own fund investments and the 
higher exposure to credit and real estate cycles relative to peers as 
weaknesses that could hurt the firm's performance during downcycles. The 
incentive income contribution to distributable earnings remains greater for 
Fortress than for many of its peers. This exposes the firm to potential 
earnings volatility, which we view as a weakness.

Fortress has managed private-equity, credit, and "macro" hedge funds, which 
take macroeconomic bets, for more than 12 years. Its performance has rebounded 
strongly following the crisis in 2008, and it continues to steadily attract 
capital. We expect that Fortress will maintain its place as one of the largest 
alternative asset management companies in the U.S. as management keeps adding 
new investment strategies and steps up distribution efforts as part of its 
growth strategy.

Outlook
The stable outlook reflects our view that Fortress will continue to steadily 
increase its fee-paying AUM and that the funds' performance will be in line 
with, or even better than, their benchmarks. We also expect the firm will seek 
to further diversify its revenue streams. We could downgrade Fortress if its 
AUM falls to less than $30 billion as a result of weak performance or investor 
withdrawals, or if its liquidity, profitability, leverage, or debt-servicing 
ability weakens to speculative-grade levels. We could raise our rating on 
Fortress if fee-paying AUM continues to increase, resulting in a greater slice 
of revenue from stable and recurring fee-related earnings. However, we think 
an upgrade is unlikely in the next 12 months.

Related Criteria And Research
     -- Rating Private Equity Companies' Debt And Counterparty Obligations, 
March 11, 2008
     -- Counterparty And Debt Rating Methodology For Alternative Investment 
Organizations: Hedge Funds, Sept. 12, 2006

Ratings List

Upgraded
                                        To                 From
FIG LLC
 Counterparty Credit Rating             BBB/Stable/--      BBB-/Stable/--
 Senior Secured                         BBB                BBB-



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