TEXT - Fitch rates Carlyle Holdings Finance LLC
Jan 15 - Fitch Ratings assigns an 'A-' rating to $500 million of ten-year senior unsecured notes issued by Carlyle Holdings Finance L.L.C., an indirect finance subsidiary of The Carlyle Group L.P. (Carlyle). These notes are guaranteed on a joint and several basis by Carlyle Holdings I L.P., Carlyle Holdings II L.P., Carlyle Holdings III L.P. and Carlyle. Fitch recently assigned initial 'A-' long-term IDRs to various subsidiaries of Carlyle with a Stable Rating Outlook. Additional information is available in the Jan. 4 press release, 'Fitch Assigns Initial 'A-' IDR to the Carlyle Group; Outlook Stable', available at 'www.fitchratings.com'. The ratings and Stable Outlook reflect Carlyle's experienced management team, favorable track record and its strong diversity by asset class, geography, fund holdings, fund vintages, fund strategies and investors. Ratings are constrained primarily by Carlyle's higher-than-average leverage, as measured by debt relative to management fee-related cash flow (FEBITDA). Carlyle's senior unsecured debt issuance further highlights the leverage differential between Carlyle and its peers and will be a key rating driver and sensitivity going forward. Proceeds from the note issuance are expected to be used, in part, to refinance revolver borrowings stemming from the recent transaction with NGP Energy Capital Management and to pay down a portion of the outstanding term loan. The entire issuance proceeds are not being used to repay existing debt, which Fitch views negatively. Though Fitch focuses on FEBITDA for debt servicing purposes, the rating agency recognizes that it can be augmented by net realized performance fees. Carlyle's net realized performance fees have been sizeable though variable, primarily benefiting from the strength and diversity of its corporate private equity business. The potential for net realized performance fees enhances Carlyle's overall credit profile. However, Fitch recognizes that the ability to generate performance fees is susceptible to difficult market periods. Therefore, Fitch believes management fee-related earnings are the most reliable source for debt service. General rating constraints for the industry include: --'Key person' risk, which is institutionalized throughout many limited partnership agreements; --Reputational risk, which can impact the company's ability to raise future funds; and --Legal and regulatory risk, which could affect the alternative asset space. RATING SENSITIVITY/KEY RATING DRIVERS The Stable Outlook reflects Fitch's expectation that Carlyle will continue to increase management fees and fee earning AUM through new funds and potential acquisitions, produce favorable investment performance, and retain a solid liquidity profile. A negative rating action may be warranted if debt increases unless accompanied by acquisitions or other growth initiatives additive to FEBITDA. Material changes in senior management, significant declines in investment performance, and less robust liquidity management could also pressure ratings. Legislative risk and/or prolonged market disruptions that impact the ability to fundraise or arrange attractive exit opportunities could result in negative rating momentum for the industry overall. Upward momentum in the ratings is limited given high leverage levels. Established in 1987, Carlyle is one of the leading alternative asset managers with four business segments including: corporate private equity, real assets, global market strategies and fund of fund solutions. The Carlyle Group employs more than 1,300 people in 32 offices across six continents. Fitch assigns the following rating: Carlyle Holdings Finance L.L.C. --Senior unsecured debt 'A-'.
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