NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-' Long-Term Issuer Default Rating (IDR) to Virtu Financial LLC (Virtu) and a 'BB-' rating to Vitru's senior secured debt. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Virtu's established market position as a technology-driven market maker across various venues, geographies and products. They also reflect its diversified and growing revenue base, scalable business model, and experienced management team. Fitch believes that Virtu's passive, market-neutral trading strategies in highly liquid products and with extremely short holding periods minimize market and liquidity risks. Additionally, the firm's risk controls appear to be robust, as evidenced by minimal instances of material historical operational losses.
Quantitative factors supporting the ratings include the firm's consistent earnings performance, robust margins, moderate leverage and strong interest coverage. On a trailing 12 month (TTM) 2Q16 basis, the adjusted EBITDA margin (as calculated by Fitch as EBITDA excluding non-cash compensation and other one-time charges divided by total revenue) was 42.2%, consistent with previous years. As of 2Q16, leverage, as measured by debt (senior secured credit facility) to TTM adjusted EBITDA was moderate at 1.7x and interest coverage was strong at 11.2x on an adjusted EBITDA to interest expense basis. Fitch also considers secondary leverage metrics including total debt (including short-term credit facilities and broker-dealer credit facilities) to EBITDA and total debt to equity. On the basis of these two metrics, Virtu's leverage ratios were 2.70x and 1.58x, respectively for TTM2Q16, both of which are viewed as acceptable relative to the assigned ratings.
Primary rating constraints include elevated operational risk inherent in technology-driven trading, reliance on volatile transactional revenue, potential competitive threats arising from evolving market structures and technologies and heightened regulatory scrutiny of designated market-making, high-frequency trading and dark pools. Other rating constraints include a relatively limited funding and liquidity profile primarily reliant on short-term secured funding facilities, an elevated payout ratio and a moderate level of key-man risk associated with the firm's co-founders whose departures could affect Virtu's franchise and long-term strategic direction.
The 'BB-' senior secured debt rating is equalized with Virtu's IDR, reflecting Fitch's expectation for average recoveries given the absence of material unencumbered assets or subordinated debt which might otherwise improve recovery prospects. Fitch has been made aware that Virtu is contemplating refinancing its existing senior secured debt facility with the intention to extend the maturity and improve the interest expense without impacting leverage. Were this refinancing to take place, Fitch would expect to assign a similar rating to the new facility, subject to the terms being consistent with Fitch's expectations.
The Stable Outlook reflects Fitch's expectation that over the Outlook horizon Virtu will maintain its low market risk profile, consistent management team and capitalization and liquidity levels.
Positive rating action, though likely limited to the 'BB' rating category, could result from a continuation of consistent operating performance and minimal operational losses over a longer period of time while maintaining cash flow leverage and interest coverage near current levels. A higher proportion of income derived from service contracts (only 1.3% of TTM 2Q16 total revenue), positive tangible equity and increased funding flexibility, including demonstrated access to third party funding through a variety of market cycles, could also contribute to positive rating momentum.
Negative rating action could result from material operational or risk management failures, adverse regulatory or legal actions, or failure to maintain Virtu's market position in the face of evolving market structures and technologies. A material shift into trading less liquid products, a sustained increase in leverage approaching or above 3.5x on a debt (senior secured credit facility) to adjusted EBITDA (excluding non-cash compensation and other one-time charges) basis or a reduction in interest coverage approaching or below 3.0x on an adjusted EBITDA to interest expense basis could also have negative rating implications.
Fitch has assigned the following ratings:
--Long-term IDR 'BB-';
--Senior secured debt 'BB-'.
The Rating Outlook is Stable.
Relevant Committee Date: Sept. 28, 2016.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
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