Nov 12 - Fitch Ratings has completed a peer review of five rated Alternative
Asset Managers (AAMs) and related entities in concert with the publication of an
industry report, titled 'Alternative Asset Managers: An Industry Update', which
is now available on Fitch's website.
Based on this review, Fitch has upgraded the Long-term Issuer Default Rating
(IDR) and unsecured debt rating of Oaktree Capital Group, LLC (Oaktree)
to 'A' from 'A-'. Concurrently, Fitch has affirmed the Long-term IDRs of The
Blackstone Group L.P. (Blackstone) at 'A+', Fortress Investment Group LLC
(Fortress) at 'BBB', KKR & Co. L.P. (KKR) at 'A', and KKR
Financial Holdings LLC (KFN) at 'BBB'. A full list of ratings is
provided at the end of this release. The Rating Outlook for all AAMs is Stable.
The upgrade of Oaktree's ratings reflects the firm's consistent operating
performance despite the challenging economic environment. The firm's stable cash
flow generation is supported by its superior operating efficiencies, the strong
blended management fee rate, given the absence of a step-down in the management
fee percentage once closed-end funds enter their liquidation period and a lack
of reliance on transaction and monitoring fees for revenue, all of which are
credit strengths relative to the peer group. Fitch also believes the company's
investment strategy and credit focus yields a more liquid underlying portfolio
than certain peers which have a greater focus on more traditional private equity
(PE) investments. Additionally, Oaktree's decision to defer incentive income
recognitions until the income is fixed or determinable, all related
contingencies have been removed, and collection is reasonably assured reduces
clawback risk for the firm.
Oaktree's fundraising strategy includes sizing funds based on management's
determination of investment opportunities given the global environment, as
opposed to simply increasing fee-earning AUM (FAUM). As a result, new funds can
be meaningfully smaller than predecessor funds, which can result in revenue and
cash flow declines period-to-period. Still, the breadth of the firm's product
offering combined with the variable cost structure mitigates that concern to
some extent. Furthermore, while Fitch recognizes that approximately 45% of FAUM
is in open-end funds and evergreen structures which earn fees based on net asset
value (NAV), these funds demand a lower fee rate, meaning that, on average,
about 23% of Oaktree's management fees have come from NAV-based vehicles over
time (since 2008), which Fitch believes is manageable and comparable to
The rating affirmations for the remainder of the space reflect relative
stability in terms of core operating fundamentals, given the locked-in nature of
a large portion of the fee streams. FAUM has generally been on an increasing
trend with follow-on funds and expansion into other product categories through
step-out strategies or acquisitions. Fitch believes these trends add diversity
to the fee stream and the investor base. Fee-related earnings have generally
grown across the space in recent years, although to a lesser extent than FAUM
given expansion into product categories that garner lower fee rates, like hedge
funds, CLOs, and certain credit funds. Still, transaction and monitoring fees
have declined in 2012, relative to historical averages, with reduced PE
portfolio investments and exits, which have a greater impact on KKR and
Issuer liquidity has remained solid, with all firms in a negative net debt
position at Sept. 30, 2012, when adjusting for cash and liquid securities on
hand. Clawback exposures have declined from crisis highs with improved
underlying fund valuations.
Leverage levels, as measured by debt divided by fee-EBITDA, have generally
trended down with growth in fee-related earnings and debt repayment. Fortress'
leverage will decline to zero, on a pro forma basis, in 4Q'12 following the
repayment of all debt in October 2012. While Fitch views the reduced leverage
favorably, we do believe the firm may look to access the public debt markets in
the future to grow and help fund co-investment commitments. That said leverage
is expected to be modest and well within Fitch's investment grade tolerance of
2.5 times (x) or below.
Blackstone's leverage rose in 3Q'12 following its issuance of $650 million of
notes. Debt proceeds were used, primarily, to replenish liquidity reserves used
for recent acquisitions. The firm's leverage was 2.31x on a trailing 12 month
basis at 3Q'12, or 2.16x when including interest, dividends, and other revenue.
Fitch expects this ratio to decline over time as acquisitions and FAUM growth
add incremental FEBITDA in coming quarters.
While core issuer fundamentals remain solid, risks to the industry are present
given global economic uncertainties and underperforming equity markets.
Fundraising has been more challenging since the crisis, requiring significantly
more lead time, but uncalled capital for rated issuers is considerable. Fitch
believes pressure to deploy capital is on the rise, particularly given the
perceived availability of cheap assets in Europe and investor appetite for
higher returns to offset the low interest rate environment and below hurdle
equity returns. While attractive investment opportunities are certain to arise,
selectivity is critical and Fitch does have concerns about the potential for
vintage concentrations heading into 2013.
The ratings of KFN are supported by its inherent linkage and strong relationship
with the parent of its investment manager, KKR, which has demonstrated implicit
and explicit support of the company in recent years. Implicit support is
evidenced by KFN's use of the KKR brand, while explicit support is evidenced by
KKR having backstopped an equity underwriting for KFN, having provided it with a
liquidity facility, and having waived a portion of management fees owed during
RATING DRIVERS AND SENSITIVITIES
The Stable Rating Outlooks reflect Fitch's expectations that the AAMs will
continue to generate stable management fees, grow/retain FAUM through the
raising of new and expansion of existing funds, produce consistent investment
performance which supports future fundraising, operate with relatively low
leverage, and retain a solid liquidity profile in order to meet co-investment
commitments to funds.
Fitch believes positive rating momentum for Blackstone, KKR, and Oaktree is
limited, given the nature and risk profile of the business, in addition to the
impact that key man events and/or reputational damage can have on the franchise
and future fundraising prospects.
For Fortress, positive rating momentum could result from growth in FAUM that
produces more reliable fee streams, further revenue diversity, improved core
operating consistency, reduced NAV exposure, and additional funding flexibility,
as demonstrated by access to the unsecured debt markets.
Individual negative rating actions could be driven by material changes in senior
management, declines in investment performance, meaningful FAUM contraction
which impairs fee-EBITDA, reduced product line diversity, increases in leverage
above Fitch's investment grade tolerance, and/or impairment of the liquidity
profile as it relates to operating needs, debt maturities, and co-investment
Legislative risk and/or prolonged market disruptions that impact the ability to
fundraise or arrange attractive exit opportunities could yield negative rating
momentum for the industry overall.
Fitch has upgraded the following with a Stable Outlook:
Oaktree Capital Management, L.P.
-- Long-term IDR upgraded to 'A' from 'A-'; and
-- Long-term senior debt upgraded to 'A' from 'A-'.
Oaktree Capital Group, LLC
Oaktree Capital Group Holdings, L.P.
Oaktree Capital I, L.P.
Oaktree Capital II, L.P.
Oaktree AIF Investments, L.P.
-- Long-term IDR upgraded to 'A' from 'A-'.
Fitch has affirmed the following with a Stable Outlook:
Blackstone Holdings Finance Co. L.L.C.
-- Long-term IDR affirmed at 'A+;
-- Senior unsecured debt affirmed at 'A+'; and
-- Short-term IDR affirmed at 'F1'.
The Blackstone Group L.P.
Blackstone Holdings I, II, III, and IV L.P.
-- Long-term IDR affirmed at 'A+; and
-- Short-term IDR affirmed at 'F1'.
-- Long-term IDR 'BBB';
-- Short-term IDR 'F2'; and
-- Secured debt at 'BBB'.
Fortress Investment Group LLC
Fortress Operating Entity L.P.
Principal Holdings I L.P.
-- Long-term IDR 'BBB'; and
-- Short-term IDR 'F2'.
KKR Group Finance Co. LLC
-- Long-term IDR at 'A';
-- Senior unsecured debt at 'A'.
KKR & Co. L.P.
KKR Management Holdings L.P.
KKR Fund Holdings L.P.
-- Long-term IDR 'A'.
KKR Financial Holdings LLC
-- Long-term Issuer Default Rating (IDR) at 'BBB'; and
-- Unsecured debt rating at 'BBB'.
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 Rating Criteria' (Aug. 15, 2012);
-- 'Investment Manager and Alternative Funds Criteria' (Dec. 23, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria