Fitch Assigns 'BBB' Expected IDR to Antares Holdings; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an expected Long-term Issuer Default Rating (IDR) and expected secured debt rating of 'BBB(EXP)' to Antares Holdings (US LP) (Antares). The Rating Outlook is expected to be Stable.

The expected ratings would convert to actual ratings upon the finalization of the separation of Antares from General Electric Capital Corporation (GECC) and the execution of the secured funding facilities at the holding company, provided that both are undertaken in a manner consistent with Fitch's expectations, as outlined herein.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT

The expected ratings reflect Antares' strong middle market franchise and expansive sponsor relationships, which provide access to ample deal flow, and a consistent and peer-superior middle market underwriting track record through a variety of market cycles. The ratings also reflect Fitch's belief that Antares has a lower-risk portfolio profile than other lenders in the middle market, as evidenced by its focus on senior lending positions, lower portfolio yields than lenders making riskier loans (i.e. strong risk-adjusted returns), low portfolio concentrations, minimal exposure to equity investments, and strong asset quality. Other factors influencing the expected ratings include the firm's consistent earnings performance through economic cycles, a strong and experienced management team, and the strength of the capital markets business, which provides a relatively reliable fee stream and allows for the potential reduction of balance sheet risk in frothier market conditions.

The expected ratings include a one-notch uplift from Antares' expected stand-alone credit risk profile of 'BBB-' reflecting Fitch's assessment of implicit support provided by the Canada Pension Plan Investment Board (CPPIB). Fitch believes CPPIB's investment in Antares is long-term and strategic in nature, as evidenced by the size of the initial investment, expected plans for growth and its involvement in the management and design of Antares' capital structure. While Antares is first and foremost an investment that must meet CPPIB's minimum long-term return thresholds, it is also complementary to CPPIB's stated desire to deploy capital at attractive risk-adjusted returns. Therefore, Fitch believes that CPPIB may provide modest credit or liquidity support to Antares, if necessary, to weather or take advantage of temporary market dislocations.

Fitch does not publicly rate CPPIB but views it to be of the highest credit quality based on its scale and importance in supporting the Canada Pension Plan (CPP). CPPIB is registered as a federal Crown Corporation and invests funds not needed by the CPP to pay current benefits on behalf of 18 million contributors and beneficiaries. CPPIB also exhibits strong cash-flow generation produced from a legislatively mandated system of capital flows, strong coverage of liabilities by liquid assets and the diversification and long-term investment horizon of CPPIB's investment portfolio.

Rating constraints include higher-than-peer leverage, a fully secured and relatively undiversified funding profile, the potential liquidity and leverage impacts of meaningful draws on portfolio company revolver commitments, and execution risk associated with the separation of Antares from GECC, which will include the purchase and/or creation of a variety of risk management systems, a Treasury department, and other back-office functionality. The ratings also contemplate the current aggressive underwriting conditions in the middle market lending space more broadly, and the potential for expanded risk appetite associated with Antares' envisioned growth in the unitranche lending space.

Upon closing of the transaction, Antares is expected to have over $10 billion of assets, consisting of $7.5 billion of senior secured term loans and revolving credit facilities to middle market companies in addition to a $3 billion broadly syndicated loan portfolio and a $400 million equity co-investment portfolio. The announced purchase price of over $12 billion will be funded with an equity contribution of nearly $4 billion from CPPIB and secured term financing from a syndicate of banks. While funding will be fully secured at the outset, Fitch expects funding diversification to develop over time, with potential access to the term securitization market and the unsecured debt markets. An improvement in funding flexibility would be viewed favorably.

Firm leverage, as measured by consolidated debt-to-equity, is expected to be in excess of 3.0x at inception, albeit with the potential for it to decline over time as the purchase financing is paid down. Regardless, leverage is expected to be higher than business development companies, which have asset coverage requirements that effectively limit debt-to-equity to 1.0x, but Fitch believes capitalization will be managed commensurate with the risk profile of the portfolio and the firm's current rating level.

Historical Antares joint ventures, like the Senior Secured Loan Program with Ares Capital Corporation (ARCC), are not part of the CPPIB transaction. As a result, Antares is expected to seek to expand its balance sheet exposure to unitranche loans. While the relative risk of these assets is higher than that of first lien loans, which account for the majority of the existing portfolio, they do offer higher yields and are believed to be an important part of the firm's product set for competitive reasons. Antares' credit performance in the unitranche space, as demonstrated through its ARCC joint venture, has been strong since the creation of the program in 2007, with only one investment having gone on non-accrual. Fitch expects the firm will continue to carefully manage its exposure to unitranche loans and does not expect a marked shift in underlying portfolio company statistics, like leverage and interest coverage, to result.

From an earnings perspective, Antares has historically benefited from GECC's attractive funding costs and back-office scale, in addition to higher leverage on the business. Returns are expected to decline as these advantages subside, but partially offsetting this impact is an expected increase in loan yields, given heavier balance sheet exposure to unitranche loans, as well as a reduction in regulatory infrastructure expenses, as Antares will no longer be part of a systemically important financial institution. Overall, Fitch believes the firm's returns will remain more attractive than lower-rated non-bank financial institutions, particularly given is continued scale and franchise strength.

Given the sizeable revolver portfolio, which has been a core part of the business historically, Fitch expects Antares will maintain adequate liquidity to meet potential peak revolver draws during periods of market stress. Fitch believes the firm will have considerable discretion surrounding shareholder distributions to CPPIB due to the ownership structure.

Fitch believes Antares has a strong and experienced management team. Leadership at the company includes the founding members, many of whom had previously worked at middle market lender Heller Financial Inc. The team, on average, has over 25 years of industry experience and has worked together for more than 10 years.

The expected Stable Rating Outlook reflects Fitch's expectation that, over the outlook horizon, Antares will maintain appropriate underwriting discipline, management acumen and capitalization and liquidity levels to navigate the currently competitive middle market lending conditions while managing the execution risks associated with Antares' ownership transition.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Positive rating action with respect to Antares' stand-alone credit profile could result from a reduction in leverage, improved funding flexibility, including demonstrated access to the unsecured debt markets and the term securitization markets through a variety of market cycles, an enhanced liquidity profile, including targeted cash balances for working capital needs and/or unsecured revolving capacity, and a continuation of strong operating performance despite higher funding costs, a new capital structure, and a very competitive operating environment. Strong execution of the transition to a standalone company, with no interruption in market position, business relationships, and/or risk management functionality, could also support positive rating momentum.

Negative rating actions with respect to Antares' stand-alone credit profile could result from an increase in leverage, material deterioration in asset quality, an alteration in the perceived risk profile of the portfolio, a weakening liquidity profile, material operational or risk management failures, and/or damage to the firm's franchise which negatively impacts its access to deal flow, sponsor relationships, and syndication capabilities. Negative rating action could also result should Fitch believe there has been reduction in the strategic importance of the Antares platform to CPPIB, thereby negatively impacting the potential for support.

Fitch has assigned the following expected ratings to Antares:

--Long-term IDR 'BBB(EXP)';

--Secured debt 'BBB(EXP)'.

The expected Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com.'

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

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Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Alyssa Castelli, New York
+1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Alyssa Castelli, New York
+1-212-908-0540
alyssa.castelli@fitchratings.com