DBRS Morningstar Confirms Antares Holdings LP at BBB (high); Trend Revised to Negative from Stable

DBRS, Inc. (DBRS Morningstar) 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 has been revised to Negative from Stable. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA2. 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 Morningstar) ownership stake of approximately 83% in Antares. DBRS Morningstar notes that since the final ratings benefit from just one notch of uplift from the IA, the SA2 designation better reflects this support rather than the previous Support Assessment of SA1 that generally notches from the parent’s rating.

KEY RATING CONSIDERATIONS
The Negative trend reflects DBRS Morningstar’s view that Antares, as a direct lender to U.S. middle market companies, is facing considerable headwinds over the near-term. Many of Antares’ portfolio companies are likely facing significant pressures in the current environment. Given the abrupt and severe economic contraction caused by the Coronavirus Disease (COVID-19), combined with the uncertainty of the magnitude and duration of the downturn, DBRS Morningstar expects a significant impact on the Company’s financial results and the credit performance of its loan portfolio. Investments on non-accrual status are likely to rise over the near-term, further pressuring profitability and balance sheet fundamentals. These concerns are somewhat mitigated by support from private equity sponsorship, which may invest additional capital in their portfolio companies, although support may be selective.

Supporting the ratings is the Company’s strong franchise which has significant scale in lending to U.S. middle market companies, combined with deep industry expertise and long-standing relationships with over 400 private equity sponsors, syndication partners, including asset managers, mutual funds, insurance companies, hedge funds and banks. We also expect that Antares’ disciplined credit risk management and strong loan workout capabilities will benefit the Company during this highly stressed period. In addition, we view implicit support from CPPIB as likely as it has a substantial ownership stake in Antares. Furthermore, Antares is CPPIB’s single largest private equity investment.

RATING DRIVERS
DBRS Morningstar sees a reversion to a Stable trend as unlikely for the duration of the coronavirus-related downturn. Over the longer-term, the trend could revert back to Stable if the Company were to sustain appropriate balance sheet fundamentals, while generating acceptable earnings despite the headwinds from the downturn. Conversely, a significant deterioration in financial performance and weakened credit fundamentals as a result of the current economic downturn would result in a ratings downgrade. Furthermore, while unexpected, a divestiture or a substantial reduction of CPPIB’s ownership stake in the Company signaling CPPIB’s diminished interest in being a long-term partner and capital provider to Antares, would result in a ratings downgrade.

RATING RATIONALE
The Company’s defendable franchise is underpinned by its leading position as lender to sponsor-backed companies, arranger and syndicator in the U.S. middle-market financing with $27.5 billion of capital under management and administration at December 31, 2019 (YE19). The Company is diversifying its franchise and product breadth via a growing asset management platform, though this is still in early stages. Antares benefits from a seasoned senior management team with significant industry experience that has successfully navigated the Company and its predecessor entities through multiple challenging economic environments.

Antares will likely face earnings headwinds in the coming quarters, as U.S. middle market companies are facing significant challenges in the current environment. Most of the Company’s revenue is comprised of spread income from its lending relationships that is supplemented by fee income derived from its capital market and asset management businesses. In 2019, Antares delivered solid profitability with return on average assets in low-to-mid single digits and return on average equity in low-double digits. The Company also registered revenue growth acceleration and positive operating leverage. For 2020, we expect the Company’s earnings generation to come under significant pressure due to the economic fallout from the coronavirus pandemic that has resulted in anemic business activity and market disruption.

We view the Company’s risk profile as solid and supported by a disciplined approach to credit and operational risk management. While Antares extends credit to the inherently riskier middle market space, the Company’s key portfolio features partially mitigate such risks. Antares’ highly diversified portfolio of senior-secured and mostly first-lien loans to sponsored-backed or controlled companies reinforces its underlying asset quality. We expect sponsors could provide borrower companies with additional capital and support not otherwise available to non-sponsored companies. Antares also benefits from its position as lead agent for the vast majority of its deal volume (most of which from existing relationships), supporting its ability to workout problem loans. In 2019, the Company’s portfolio asset quality remained solid with low levels of non-accruals and net charge-offs. Nonetheless, we expect credit performance to substantially deteriorate in 2020 due to the coronavirus pandemic induced downturn.

Antares’ key reliance on secured forms of funding, resulting in a highly encumbered balance sheet constitutes a ratings constraint. With that said, the Company has made steady progress in diversifying its funding mix over the past four years, from solely being comprised of secured credit facilities to also include collateralized loan obligations (CLO) and unsecured debt. Indeed, the Company has completed seven CLO transactions for a total of approximately $5.7 billion in net proceeds, and an inaugural senior unsecured debt issuance of $280.0 million, accounting for approximately 39% and 2% of its funding at late April 2020, respectively. Antares’ focus on aligning its funding sources with its uses limits rollover risk. In late April 2020, Antares had approximately $4.4 billion of available liquidity including cash on hand and untapped borrowing capacity under its credit facilities, adequate to meet its liquidity needs and the potential draws on its revolver loans.

The Company maintains sound capitalization. At YE19, tangible common equity-to-tangible assets ratio was strong at 25.4%, providing ample loss absorption capacity. Further, the leverage ratio remained moderate at YE19 with debt-to-tangible common equity at 2.8 times (x), flat from YE18. We expect the leverage ratio to increase modestly in the near-term as the Company is likely to gradually utilize a portion of its available funding sources to further fortify its liquidity position given the current economic environment. While the capital position remains solid, out of its cautious stance, Antares chose (and CPPIB/Northleaf were aligned) to forego capital distributions for 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 24, 2019) which can be found on our website under methodologies and criteria: https://www.dbrsmorningstar.com/research/350802/global-methodology-for-rating-non-bank-financial-institutions

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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