Fitch Assigns Initial 'A-' IDR to The Carlyle Group; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned initial long-term Issuer Default Ratings (IDRs) of 'A-' and senior unsecured debt ratings of 'A-' to various subsidiaries of The Carlyle Group L.P. (Carlyle). A complete list of subsidiaries is at the end of this rating action commentary. The Rating Outlook is Stable.

The ratings and Stable Outlook are underpinned by Carlyle's favorable performance track record and its strong diversity by asset class, geography, fund holdings, fund vintages, fund strategies and investors. Carlyle's experienced management team and extensive organization across investment management areas and back office functions are additional rating positives.

The ratings are constrained primarily by Carlyle's leverage, as measured by debt relative to management fee-related cash flow (FEBITDA), which is higher-than-average among major rated peers. At end 3Q12, debt/FEBITDA stood at 2.6x based on annualized YTD results versus an average of 2.1x for rated peers.

Carlyle's corporate private equity business is a key competitive strength. Carlyle has more diversity than peers in terms of number of funds, portfolio companies, industries, geographic markets and limited partner investors. Carlyle currently has a sizeable amount of uncalled capital or 'dry powder' to take advantage of market opportunities. The company remains active in new fund raising and further diversifying its already strong franchise.

Carlyle's continued expansion into other businesses has improved its diversity in recent years but potentially adds acquisition and integration-related risks. To date, Carlyle has successfully integrated numerous acquisitions and appears to have appropriate management expertise and operational infrastructure to assimilate new businesses into the group. Acquisitions have included CLO management contracts, mid-sized hedge funds, a fund of funds manager, a middle market lending platform and a group specializing in power projects.

In December 2012, Carlyle announced the acquisition of a 47.5% revenue interest in NGP Energy Capital Management, an energy focused fund manager with $12 billion in AUM as of Sept. 30, 2012 and a favorable performance track record in its major funds. This acquisition gives Carlyle additional scale to compete in the energy space.

The NGP deal is expected by management to generate an additional $50m immediately in annual fee revenues with the potential for additional revenues and incentive fees. Initial cash consideration totaled $384 million along with $40 million in Carlyle units. Given the large cash component of the NGP acquisition, there is the possibility that leverage could rise in the near term. However, NGP is anticipated to generate a considerable amount of incremental FEBITDA in 2013.

For debt service purposes, Fitch focuses on FEBITDA but recognizes that it can be augmented by the generation of net realized performance fees. In the case of Carlyle, 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 in future periods enhances Carlyle's overall credit profile. However, Fitch recognizes that the ability to generate performance fees is susceptible to difficult market periods (such as the recent financial crisis) and therefore 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 DRIVERS AND SENSITIVITIES

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.

Negative rating action could be driven by increases in debt unless accompanied by accretive acquisitions or other growth initiatives that add to FEBITDA. Material changes in senior management, significant declines in investment performance, and less robust liquidity management could 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 at least in the short run, but positive rating momentum could emerge over time if Carlyle reduces leverage to levels more in line with peer norms, while maintaining its size, diversity and high proportion of stable management fees.

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 has assigned the following initial ratings with a Stable Outlook:

Carlyle Investment Management L.L.C.

--Long-term IDR 'A-';

--Senior Unsecured Debt 'A-'.

TC Group Investment Holdings, L.P.

--Long-term IDR 'A-';

--Senior Unsecured Debt 'A-'.

TC Group Cayman Investment Holdings, L.P.

--Long-term IDR 'A-';

--Senior Unsecured Debt 'A-'.

TC Group Cayman, L.P.

--Long-term IDR 'A-';

--Senior Unsecured Debt 'A-'.

TC Group, L.L.C.

--Long-term IDR 'A-'.

Carlyle Holdings I L.P.

--Long-term IDR 'A-'.

Carlyle Holdings II L.P.

--Long-term IDR 'A-'.

Carlyle Holdings III L.P.

--Long-term IDR 'A-'.

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);

--'2013 Outlook: Investment Managers and Alternative Funds' (Oct. 22, 2012);

--'Alternative Asset Managers: An Industry Update' (Nov. 12, 2012);

--'Investment Manager and Alternative Funds Criteria' (Dec. 17, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

2013 Outlook: Investment Managers and Alternative Funds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692316

Alternative Asset Managers: An Industry Update (Yield Appetite, Market Dislocation Offer Opportunities for Continued Growth)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694772

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696673

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts

Fitch Ratings
Primary Analyst
Joseph Scott, +1-212-908-0624
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nathan Flanders, +1-212-908-0827
Managing Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Joseph Scott, +1-212-908-0624
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Nathan Flanders, +1-212-908-0827
Managing Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com