Fitch Affirms Antares Holdings LP at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and secured debt rating of Antares Holdings LP (US LP) at 'BBB'. The Rating Outlook is Stable.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The rating affirmations 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 (although strong risk-adjusted returns), low portfolio concentrations, minimal exposure to equity investments, and strong asset quality. Other factors influencing the 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 ratings include one-notch of uplift from Antares' 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 and on-going investments, 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. The company has continued to increase its involvement in proprietary deals in recent years. 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. Since the closing of the transaction, the CPPIB has committed additional capital to fund Antares' investment in the Middle Market Growth Program (MMGP), a joint venture with Lone Star Funds.

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 19 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 for Antares 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 on-going separation of Antares from General Electric Capital Corporation (GECC), at a time when GECC is managing the transition of a number of recently-announced, large scale business sales. Antares' transition to a fully stand-alone operational platform includes 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, given uneven supply/demand dynamics, and the potential for expanded risk appetite associated with Antares' envisioned growth in the unitranche lending space.

Since the transaction closed on Aug. 21, 2015, Antares has recognized solid portfolio growth, despite a decline in market activity. Fitch believes Antares' scale and syndication capabilities provide a competitive advantage as it can commit to larger hold sizes and provide certainty of close. Its track record in syndication has been very strong, supported, in part, by several strategic investment partnerships, which participate in deals based upon pre-approved criteria. At March 31, 2016, the par value of the firm's loan portfolio was over $11.5 billion, consisting largely of first lien term loans and cash flow revolvers.

GECC's unitranche lending joint venture between Antares and Ares Capital Corporation (ARCC), called the Senior Secured Loan Program, was not part of the CPPIB transaction. As a result, Fitch expected Antares to seek to expand its balance sheet exposure to unitranche loans over time. In January 2016, Antares announced a partnership with LStar Capital, a credit affiliate of Lone Star Funds to provide unitranche loans to middle market borrowers through the MMGP. The MMGP has the ability to provide up to $250 million in financing for a single transaction. Antares will provide a large portion of the mezzanine financing in the investment vehicle and expects to generate attractive returns, similar to other unitranche fund joint ventures in the middle market. The MMGP is expected to be Antares' predominant funding vehicle in the unitranche space, although unitranche loans could also be booked directly on Antares' balance sheet.

While the relative risk of unitranche loans is higher than that of first lien loans, which account for the majority of Antares' 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. 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 go away, but partially offsetting this impact could be a modest increase in portfolio yields, given heavier exposure to unitranche loans, and a reduction in regulatory infrastructure expenses, as Antares will no longer be part of a systemically important financial institution. While earnings, over the near term, will be impacted by transaction expenses and infrastructure buildout, Fitch believes the firm's returns will remain stronger than lower-rated non-bank financial institutions, particularly given Antares' continued scale and franchise strength.

Firm leverage, as measured by consolidated debt-to-tangible equity, is expected to be in the 2.5x to 3.0x range over time, and amounted to 3.06x at March 31, 2016. Leverage is higher than business development company (BDC) peers, which have regulatory asset coverage requirements that effectively limit debt-to-equity to 1.0x, but Fitch believes Antares' capitalization will be managed commensurate with the risk profile of the portfolio and the firm's current rating level. Antares' portfolio is generally more senior and more diverse than BDCs and the firm also has the flexibility to retain capital in the business, while BDCs must distribute 90% of taxable earnings on an annual basis to retain their tax-advantaged status.

Antares' funding is currently fully secured, consisting of a $1.2 billion term loan and a $2 billion revolver at the holding company, secured largely by revolver borrowings and first lien term loans, and a $6.3 billion term loan and a $3 billion revolver at a bankruptcy remote special purpose vehicle, secured largely by first lien term loans. The par amount of debt outstanding was about $9 billion at March 31, 2016. Fitch expects funding diversification to develop over time, with potential access to the term securitization markets and the unsecured debt markets. An improvement in funding flexibility would be viewed favorably.

Fitch believes Antares' liquidity profile is sound. Cash on hand and operating cash are sufficient to cover annual interest expenses and quarterly amortization requirements, which aggregate to $75 million over the 12 months ending March 31, 2017. Fitch expects the firm will have considerable discretion surrounding shareholder distributions to CPPIB, due to the ownership structure, which could cushion firm liquidity during market dislocations.

Given sizeable revolver commitments, Fitch expects Antares to maintain adequate liquidity to meet potential peak revolver draws during periods of market stress. Borrowing capacity on the holding company revolver amounted to approximately $1.6 billion at March 31, 2016, which is more than sufficient to fund peak draws on revolvers at levels witnessed during the financial crisis.

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 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 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, financial reporting 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 affirmed the following ratings:

Antares Holdings LP (US LP)

--Long-Term IDR at 'BBB';

--Secured debt at 'BBB'.

The Rating Outlook is Stable.

Additional information is available on 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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008619

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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
Michael Dodge
Associate Director
+1-212-908-0379
or
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@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
Michael Dodge
Associate Director
+1-212-908-0379
or
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com