NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an initial long-term Issuer Default Rating (IDR) and unsecured debt rating of 'A-' to various subsidiaries of Apollo Global Management LLC. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect Apollo Global Management LLC's (Apollo) strong competitive position as a global alternative investment manager; its experienced management team; solid investment track record; large investor base; predictable management fee stream, given significant fee-earning assets under management (FAUM) and limited exposure to assets that earn fees based on net asset value; incentive income-generating capability; relatively low leverage; solid liquidity; and the subordination of general partner interests to outstanding indebtedness.
The ratings also reflect the joint and several guarantees provided by the various subsidiaries which collect all of the fee, carry, and investment income earned by Apollo.
Rating constraints include the large exposure to affiliate Athene Holding Ltd. (Athene), which accounts for a meaningful percentage of management and transaction fees and introduces potential regulatory and reputational risks; the recentness of Apollo's business achieving scale, which means the sustainability of margins is unproven over time; and the more limited funding flexibility relative to peers, given the lack of public market access to date, and the shorter debt maturity profile.
Similar to other alternative investment manager ratings, Apollo's ratings are also constrained by 'key man' 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 alter the alternative investment space.
FAUM amounted to $128.5 billion at March 31, 2014, up 57.5% year-over-year, driven largely by fundraising for Apollo Investment Fund VIII, L.P. and Athene's acquisition of the U.S. annuity operations of Aviva plc. The growth trajectory of FAUM has been significant in recent years, given acquisition opportunities of Athene, fundraising for follow-on funds, and organic growth in credit. The sizeable FAUM base provides for a relatively stable fee stream over time and only a small percentage of fees (5.6% at year-end 2013) are based on net asset value.
However, there are meaningful fee concentrations related to Athene and Fund VIII given their relative sizes. Apollo earns a 40 basis point management fee on $59.5 billion of Athene assets, which represented 26.6% of run-rate base management fees in 1Q'14. Fees for Fund VIII should be relatively stable over the next several years, as the fund's investment period has only just begun, but the fee stream could be tough to replace as Fund VIII is the largest fund in the firm's history and the largest buyout fund raised since the financial crisis. Fitch believes the potential reduction in private equity management fees, following the end of Fund VIII's investment period, could be offset by fundraising for Apollo's next private equity buyout fund along with organic growth in credit and real estate.
Apollo had approximately $32.2 billion of un-invested capital to put to work at March 31, 2014, at a time when valuations are high and credit market conditions are very competitive. Fitch believes outsized concentrations in current vintages could lead to fund underperformance down the road. Still, Apollo has operated through a variety of cycles and Fitch believes the firm's size, diversity, and global reach should provide for unique opportunities to invest.
Apollo's core operating performance, as measured by fee-related earnings before interest, taxes, depreciation, and amortization (FEBITDA) has been on an upward trajectory with growth in FAUM, higher advisory and transaction fees, and better operating efficiencies. The FEBITDA margin was approximately 43.7% in 1Q'14 (excluding certain one-time termination and transaction fees), which compares favorably to the peer group. Apollo's business really hit scale in 2012, so while the sustainability of the model is somewhat untested, Fitch believes management is committed to maintaining a strong operating margin.
Carried interest income has been strong, given the superior realization environment. Net realized carried interest was nearly $1.5 billion in 2013 and $259.6 million in 1Q'14, which is stronger than peers. Carried interest income is expected to decline near-term, given the amount of fund distributions in recent years, but the valuation of current fund holdings and the diversity of the platform should support the generation of further carried interest in the future. While this income stream is inherently volatile over time, the potential for meaningful incentive income does help support the firm's credit profile.
Apollo's leverage, as measured by corporate debt divided by FEBITDA, was 2.16 times (x) at March 31, 2014 on a trailing 12 month (TTM) basis, compared to 2.71x at year-end 2012. The decline was due to an increase in fees and cash flow. The ratio compares favorably to the 'A' category peer group average of 3.0x at March 31, 2014. Debt service coverage, defined as FEBITDA divided by interest expense, was also strong, at 13.97x on a TTM basis, which compares to the 'A' category peer average of 6.90x.
Fitch believes Apollo has a sound liquidity profile. At March 31, 2014, the firm was in a negative net debt position, with balance sheet cash of $1.1 billion. Unfunded commitments to the funds amounted to approximately $831 million and the clawback obligation, assuming all positions were liquidated at their current fair values, was zero.
Apollo expects to distribute substantially all of its net after-tax cash flow on a quarterly basis, which results in a relatively high payout ratio, even as compared to certain peers. Still, management does have significant discretion in its ability to reduce distributions in order to fund operating needs, or to not pay distributions at all.
RATING DRIVERS AND SENSITIVITIES
The Stable Outlook reflects Fitch's expectations that management will continue to generate stable management and advisory fees, grow/retain FAUM through the raising of new and expansion of existing funds, albeit at a much more moderate pace near-term, sustain recent operating margins, operate with relatively low leverage, and retain a solid liquidity profile in order to meet co-investment commitments to funds.
Declines in investment performance, a key man event, and/or legislative risk which negatively impact the company's ability to raise FAUM and generate fees, meaningful increases in leverage, and/or impairment of the liquidity profile could result in negative rating action. Furthermore, ratings could be adversely affected if the relationship between Apollo and Athene were to materially change as a result of regulatory scrutiny, outsized fines/penalties or loss of management or sub-advisory fees.
Conversely, positive rating momentum could develop from a demonstrated ability to operate at the current size, scale and margin level over an extended period of time. An increase in fee diversity, lower leverage, and/or stronger liquidity would also be viewed favorably.
Apollo is a global alternative investment manager specializing in private equity, credit and real estate. FAUM amounted to $128.5 billion at March 31, 2014 and total assets under management (AUM) were $159.3 billion. The company's Class A shares are listed on the NYSE under the ticker 'APO'.
Fitch has assigned the following ratings:
Apollo Management Holdings, L.P.
Apollo Management, L.P.
Apollo Capital Management, L.P.
Apollo International Management, L.P.
AAA Holdings L.P.
Apollo Principal Holdings I-IX, L.P.
ST Holdings GP, LLC
ST Management Holdings, LLC
--Long-term IDR 'A-';
--Unsecured debt rating 'A-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Criteria' (January 2014);
--'Investment Manager and Alternative Funds Criteria' (December 2013).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria