TEXT-Fitch expects to rate KKR & Co unsecured debt 'A'
Jan 25 - Fitch Ratings has assigned a long-term Issuer Default Rating (IDR) of 'A' to KKR Group Finance Co. II LLC (a subsidiary of KKR & Co. L.P.). The Rating Outlook is Stable. Concurrently, Fitch expects to assign a rating of 'A' to the unsecured notes issued by KKR Group Finance Co. II. The notes will rank equally with existing notes issued from KKR Group Finance Co. LLC. The ratings reflect joint and several guarantees on indebtedness at finance subsidiaries by KKR Management Holdings L.P. and KKR Fund Holdings L.P., which collect all fee and incentive income from underlying funds, in addition to a guarantee from KKR & Co. L.P. Proceeds from the issuance are expected to be used for general corporate purposes, including co-investment commitments to existing funds, the seeding of new fund strategies, and potential acquisition opportunities, most of which would be expected to generate incremental fee-related earnings before interest, taxes, depreciation, and amortization (FEBITDA) for the firm. At Sept. 30, 2012, KKR's leverage (debt/FEBITDA) was 1.54x, on a trailing 12-month basis, which compared favorably to peers. Leverage will increase with this issuance, and could rise moderately above Fitch's longer-term tolerance level of 2.5x in the short-term; however, Fitch expects KKR's leverage to decline over time as cash is deployed into fee-generating opportunities, such as the recent acquisition of Prisma Capital Partners, a fund-of-hedge-funds manager. Additionally, KKR's short-term leverage profile is mitigated to some extent by its superior liquidity position. Fitch expects the firm to remain in a negative net debt position, adjusting for cash, and KKR has a significant amount of investments on its balance sheet; over $5 billion at Sept. 30, 2012, a meaningful portion of which is liquid. SENSITIVITY / RATING DRIVERS The Stable Outlooks for KKR and KKR Group Finance Co. II reflect Fitch's expectation that KKR will continue to generate consistent management fees and fee-related earnings, grow fee-earnings assets under management (FAUM) through follow-on funds and expansion into new private equity and fixed-income products, manage leverage down to the historical range, and maintain a solid liquidity profile. Negative rating action could be driven by declines in investment performance which negatively impact the company's ability to raise FAUM and generate fees, meaningful increases in leverage above 2.5x longer term, and/or impairment of the liquidity profile. Positive rating momentum could be driven by an increase in fund and fee diversity and reductions in leverage. Founded in 1976, KKR is one of the largest alternative asset managers in the world with $50.3 billion of FAUM at Sept. 30, 2012. Since its inception, the company has completed more than 200 PE investments with a total transaction value in excess of $465 billion. Fitch has assigned the following rating: KKR Group Finance Co. II LLC -- Long-term IDR 'A'. The Rating Outlook is Stable. Fitch expects to assign the following rating: KKR Group Finance Co. II LLC -- Senior unsecured debt at 'A'. Existing ratings for KKR are as follows: KKR & Co. L.P. -- Long-term IDR 'A'. KKR Management Holdings L.P. -- Long-term IDR 'A'. KKR Fund Holdings L.P. -- Long-term IDR 'A'. KKR Group Finance Co. LLC -- Long-term IDR at 'A'; -- Senior unsecured debt at 'A'. The Rating Outlook is Stable. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: -- 'Global Financial Institutions Criteria' (Aug. 15. 2012); -- 'Investment Manager and Alternative Funds Criteria' (Dec. 17, 2012). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Investment Manager and Alternative Funds Criteria