S&P raises Fortress Investment Group rating to 'BBB'
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- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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