Fitch Converts Expected IDR of 'BBB' for Antares Holdings to Final Rating; Outlook Stable
KEY RATING DRIVERS
ISSUER DEFAULT RATING
The 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 (although 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 ratings include a one-notch 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 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. 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.
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.
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.
ISSUER DEFAULT RATING
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 final rating:
Antares Holdings (US LP)
--Long-term IDR of 'BBB'.
The Rating Outlook is Stable.