DBRS Confirms Antares Holdings LP at BBB (high); Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings of Antares Holdings LP (Antares or the Company), including the Company’s Long-Term Issuer Rating and Long-Term Senior Debt at BBB (high). The trend for all 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), ownership stake of approximately 83% in Antares.

KEY RATING CONSIDERATIONS
The ratings consider the Company’s strong franchise focused on lending to U.S. middle market companies, solid earnings power, disciplined credit risk management and sound capitalization. While the ratings consider Antares’ limited funding diversification, DBRS also notes the Company’s focus on aligning its funding sources with its uses that limits rollover risk. The Company has a relatively short track record as a standalone corporate entity though management has a longer history of working together at Antares’ predecessors in interest. Furthermore, DBRS views implicit support from CPPIB as likely resulting not only from its substantial ownership stake in the Company but also from the fact that Antares is CPPIB’s single largest private equity investment.

The Stable trend reflects DBRS’s expectation that Antares will continue to prudently expand its direct lending portfolio while also pursuing fee opportunities in the syndication market. Additionally, the Stable trend reflects DBRS’s expectation that the Company will maintain its sound balance sheet fundamentals.

RATING DRIVERS
The IA for Antares is well-placed in the current rating category. Over the longer-term, resilient earnings generation through an adverse economic environment accompanied by further funding diversification could result in positive ratings implications. Conversely, a divestiture or a substantial reduction of CPPIB’s ownership stake in Antares signaling CPPIB’s diminished interest in being a long-term partner and capital provider to the Company, would eliminate the one-notch uplift from the Company’s IA. Additionally, a sustained deterioration in financial results indicative of the Company’s diminishing competitive positioning in the private equity backed middle-market financing sector could result in downward ratings pressure. Furthermore, a sustained weakening in credit performance indicating Company-specific weakness in risk management or increased credit risk appetite, could have negative implications for the ratings.

RATING RATIONALE
DBRS views Antares’ franchise as strong, benefitting from its leading position as a lender, arranger and syndicator to sponsor-backed companies in the U.S. middle-market. The Company’s franchise is bolstered from its deep expertise and long standing sponsor and investor relationships. Antares has broad relationships with over 400 private equity sponsors and syndication partners, including asset managers, mutual funds, insurance companies, hedge funds and banks. Supportive of Antares’ franchise is its seasoned senior management team with substantial industry experience that has successfully guided the Company and its predecessors through challenging economic cycles. The favorable trends in the U.S. sponsored middle market financing also underpin Antares’ franchise strength and growth prospects. As of March 31, 2019, the Company had $25.6 billion of capital under management and administration.

The Company has solid earnings power, driven by a stable, recurring and well-balanced revenue mix of spread and fee income, good operating efficiency and loss absorption capacity, resulting in sound profitability metrics. Spread revenue typically accounts for most of Antares’ revenue but its revenue diversification is enhanced by fee income, mostly from syndication fees. While syndication fees can fluctuate due to market conditions in the sponsor-backed middle market, such fees provide Antares more flexibility in complementing its direct lending revenue while meeting the investment needs of its syndication partners. Spread income from direct lending drove the increase in total revenues in 2018, as the fee income contribution weakened due to lower syndication fees. In 1Q19, while spread income grew strongly, syndication fees declined sharply year-over-year (YoY) due to lower loan volumes in the overall sponsor-backed middle market. Positively, the market’s loan volume has improved in the first two months of 2Q19. Operating efficiency continues to be solid despite the sizable increase in compensation expenses recorded in 4Q18 related to the stock market volatility. Overall, the Company’s profitability metrics remained solid in 2018 and in 1Q19, with return on average assets in low-to-mid single digits and return on average equity in low-double digits.

DBRS considers Antares’ risk profile as solid with a disciplined approach to credit and operational risk management. The Company’s key portfolio attributes reinforce a strong credit performance in the inherently riskier credit extension to middle-market companies relative to larger corporations. Indeed, Antares’ portfolio is mostly comprised of first-lien loans to private equity sponsor-backed or controlled companies. The Company’s portfolio is also highly diversified among sponsors, borrowers and industries that have mostly exhibited resiliency in various economic cycles. Moreover, a substantial portion of the generated deal volume is driven by existing customer relationships where Antares already has enhanced credit insights. The Company’s credit performance in 2018 and through 1Q19 was solid with multiyear low levels of non-accruals and very low net charge-off rates, well below normalized levels.

The Company’s primary reliance on secured forms of funding, resulting in balance sheet encumbrance is a ratings constraint. Nonetheless, over the past year, Antares has made further progress in further enhancing its funding diversification, an endeavor that the Company is expected to continue over time. Specifically, in July 2018, the Company completed its inaugural senior unsecured debt issuance of $280.0 million. Further, Antares continued accessing the collateralized loan obligations (CLO) market with the issuance of three new CLOs in 2018 for a total of $2.7 billion along with an additional CLO of $500 million in May 2019. As of March 31, 2019, CLOs accounted for 39% of Antares’ funding while senior unsecured debt accounted for 2% and secured credit facilities comprised of the remainder. The Company’s target funding mix encompasses an increasingly higher proportion of CLO and unsecured debt funding. DBRS views liquidity as being acceptable and well-managed. As of March 31, 2019, Antares had over $5.0 billion of available liquidity including available borrowing capacity under its credit facilities, unrestricted cash and marketable securities.

Supportive of the ratings is Antares’ sound capitalization. The Company’s capital levels provide sufficient cushion to absorb losses, while its leverage ratio and tangible equity-to-tangible assets ratio (TCE ratio) are both aligned with the Company’s risk profile. Antares’ capitalization is supported by sound and consistent capital generation capacity and disciplined capital management. As of March 31, 2019, the tangible common equity-to-tangible assets ratio was strong at 24.9% while debt-to-tangible common equity remained moderate at 2.9 times (x), in-line with Antares’ target range of 2.5x to 3.0x. In 2018, the Company initiated a capital distribution to its unitholders followed by another one in 1Q19. These capital distributions had a modest impact on capitalization metrics and were consistent with its conservative balance sheet management.

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

The applicable methodologies are the Global Methodology for Rating Non-Bank Financial Institutions (November 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), 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.

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

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

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