DBRS Initiates Coverage of Antares Holdings LP at BBB (high), Stable Trend

DBRS, Inc. (DBRS) assigned a Long-Term Issuer Rating of BBB (high) to Antares Holdings LP (Antares or the Company). At the same time, DBRS assigned a Long-Term Senior Debt Rating of BBB (high). The trend on the ratings is Stable. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA1. The Company’s ratings are positioned one notch above its IA, reflecting the Canada Pension Plan Investment Board’s (CPPIB – rated AAA with a Stable trend by DBRS), approximately 83% ownership stake in Antares.

KEY RATING CONSIDERATIONS
The ratings consider the Company’s solid franchise and leading position serving the U.S. middle market, sound earnings generation, proven credit risk discipline and robust capitalization. The ratings also consider the Company’s limited funding diversification and the relatively short track record as a standalone entity.

In addition to the substantial ownership stake by the CPPIB that results in the one notch uplift from the IA, DBRS notes that Antares is the CPPIB’s single largest private equity investment, which in DBRS’s view makes implicit support likely.

The Stable trend reflects DBRS’s expectation that the Company will continue to prudently expand its loan book while capturing fee opportunities in the syndication market. Furthermore, the Stable trend reflects DBRS’s expectation that the Company will maintain sufficient liquidly cushions and disciplined capital management.

RATING DRIVERS
The Company is well-placed in the current rating category. Over the longer-term, additional funding sources that improve the Company’s funding diversification and resiliency could result in positive ratings implications. Conversely, a divestiture or a substantial reduction of CPPIB’s ownership stake in Antares or signaling that CPPIB is no longer a long-term partner and capital provider to Antares, would eliminate the one-notch uplift from the Company’s Intrinsic Assessment. Furthermore, a sustained deterioration in financial results indicative of the Company’s diminishing competitive positioning in the private equity backed middle-market financing sector could have negative implications for the ratings. Additionally, a material worsening in credit performance indicating a weakness in risk management, or that the Company’s credit risk appetite has increased, could also result in downward ratings pressure.

RATING RATIONALE
In DBRS’s view, Antares and its subsidiaries have a solid franchise as the leading sponsor lender, arranger and syndicator in the U.S. middle-market financing with more than $20 billion of capital under management and administration, as of March 31, 2018. The franchise is underpinned by its deep industry expertise attained over the course of over 20 years, as well as from its solid relationships with over 400 private equity sponsors and over 400 syndication partners, including asset managers, mutual funds, insurance companies, hedge funds and banks. Antares’ franchise is also bolstered by a seasoned senior management team with significant industry experience that has successfully navigated the Company and its predecessor entities through challenging economic environments. DBRS views the favorable growth trends in the U.S. sponsored middle market where Antares is the market leader that sees significant deal flows, as supportive of the ratings.

The Company’s sound earnings power is driven by resilient revenue generation capacity comprised of a well-balanced mix of spread revenue and fee income that result in attractive profitability metrics. Spread revenue, which accounts for the majority of revenues, is mostly derived from its lending relationships. Meanwhile, fee revenue is mostly comprised of syndication fees that not only enhances revenue diversification, but also provides flexibility to manage the growth and risk profile of its loan portfolio. The Company’s earnings power also benefits from its solid operating efficiency. The Company’s risk-adjusted net interest margin has been stable at approximately 4.0% over the past three years, while return on assets was also solid.

DBRS considers Antares’ risk profile as solid with a disciplined approach to credit management and Antares and its predecessors’ proven track record of strong credit performance through multiple cycles. While credit extension to middle-market companies is typically riskier relative to larger corporations, the inherent characteristics of the Company’s portfolio partially mitigate such risks. Specifically, Antares’ highly diversified portfolio of senior-secured and predominantly first-lien loans to sponsored-backed or controlled companies reinforces its strong asset quality. The Company’s strong credit performance also benefits from the substantial deal volume it generates from existing customers that Antares already knows well. The Company’s asset quality metrics remain strong. Excluding the runoff portfolio of broadly syndicated loans, Antares’ non-accrual balances and net charge-off rate have been relatively stable over the past three years and remain near cyclical lows, as of March 31, 2018. Most recently in 1Q18, the Company experienced net recoveries.

The Company is reliant on secured forms of funding, resulting in a highly encumbered balance sheet and limited diversification, both of which constrain the ratings. Positively, Antares has made tangible progress in diversifying its funding mix over the past two years, a trend that is expected to continue. Indeed, since 2Q17, Antares has completed three collateralized loan obligations (CLO) transactions for total funding of approximately $3.3 billion. As of 1Q18, the funding from CLOs comprised nearly 30% of the Company’s funding with secured credit facilities accounting for the remainder. Overall, liquidity is acceptable and well-managed in DBRS’s view.

Despite a sizeable presence of goodwill and intangibles, capital levels are strong and supportive to the ratings. Specifically, as of March 31, 2018, tangible common equity-to-tangible assets ratio was strong at 29.7%, up from 27.6% at YE17, while debt-to-tangible common equity was moderate at 2.3 times (x) and 2.6x, respectively. In May 2018, Antares distributed capital to its unitholders, but DBRS expects a minimal impact to overall capitalization metrics as a result of the Company’s sound and consistent capital generation capacity.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Finance Companies (November 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Yanni Koulouriotis, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: June 8, 2018
Most Recent Rating Update: Not applicable as no last rating date.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.