Fitch Expects to Rate Oaktree's Unsecured Notes 'A(EXP)'.
Fitch views this debt issuance as opportunistic, as interest rates remain relatively low on a global basis. Debt issuance proceeds are expected to be used to fund the prepayment of Oaktree's outstanding 2019 debt maturities, which amount to $250 million.
KEY RATING DRIVERS
The expected rating is equalized with the ratings assigned to Oaktree's existing senior unsecured debt as the new notes will rank equally in the capital structure. At Sept. 30, 2017, Oaktree's funding was fully unsecured.
Gross leverage levels are not expected to change following the unsecured debt issuance as proceeds will be used to prepay $250 million of 2019 unsecured notes. Fitch views the firm's ability to extend its debt maturity profile favorably, as it provides Oaktree with enhanced funding flexibility.
Oaktree's leverage, as measured by long-term debt divided by fee-related EBITDA (FEBITDA), was 3.12 times (x) at Sept. 30, 2017 on a trailing 12 month basis, compared to Fitch's quantitative leverage benchmark range for 'A' rated alternative investment managers (IMs) of 0.5x-2.5x. Fitch believes the firm's leverage will decline over time with growth in FEBITDA as uncalled capital is put to work and strong fundraising trends continue. Oaktree's leverage is expected to be managed, longer-term, within Fitch's 'A' category benchmark range.
Existing ratings for Oaktree reflect its strong position as a global alternative IM, solid investment track record, experienced management team, large base of fee-earning assets under management (FAUM), strong blended management fee rate, given the absence of a step-down in the management fee percentage once closed-end funds enter their liquidation period, a lack of reliance on transaction and monitoring fees for revenue, incentive income-generating capability, growing investment income from Oaktree's minority ownership in DoubleLine Capital LP, solid liquidity, and the effective subordination of general partner distributions to outstanding indebtedness.
Rating constraints for the alternative IM space include 'key man' risk, which is institutionalized throughout many limited partnership agreements, reputational risk, which can impact the company's ability to raise future funds, and legal and regulatory risk, which could alter the alternative IM space. Rating constraints more specific to Oaktree include lower relative assets under management (AUM) diversity, higher exposure to net asset value-based fees and elevated leverage, relative to Fitch's 'A' category benchmark range.
The Stable Rating Outlook reflects Fitch's expectations that Oaktree's management fees will increase over the outlook horizon as shadow AUM begins to generate management fees, which will allow for modest margin expansion and balance sheet deleveraging. The Outlook also reflects the agency's belief that Oaktree will grow/retain FAUM through the raising of new and expansion of existing fund strategies and retain a solid liquidity profile in order to fund operations and meet co-investment commitments to the funds.
The unsecured debt rating is primarily linked to changes in Oaktree's Long-Term Issuer Default Rating (IDR) and would, therefore, be expected to move in tandem. However, a meaningful increase in the proportion of secured debt in Oaktree's capital structure could result in the unsecured debt rating being notched down from the IDR, given weaker recovery prospects for the debt class.
Fitch believes positive rating momentum for Oaktree is limited, given its current rating levels and the nature and risk profile of the business, in addition to the impact that key man events and/or reputational damage can have on the franchise and future fundraising prospects. However, positive momentum could develop over time with a meaningful reduction in key man risk, an increase in fund and fee diversity, enhanced stability of incentive income through a variety of market cycles, stronger funding diversity, and further declines in leverage.
Negative rating action could result from an inability to return leverage to Fitch's 'A' category benchmark range of 0.5x-2.5x; a substantial weakening of its liquidity profile; and/or sustained declines in investment performance, a key man event, or legislative risk that negatively affects the company's ability to raise FAUM and generate management fees.
Oaktree is a global alternative IM with a focus on credit and contrarian, value-oriented investing. FAUM amounted to $80.2 billion at Sept. 30, 2017 and total AUM was $99.5 billion. The company's Class A units are listed on the NYSE under the ticker 'OAK'.
Fitch has assigned the following rating:
Oaktree Capital Management, L.P.
--Senior unsecured debt at 'A' (EXP).
Existing ratings for Oaktree are as follows:
Oaktree Capital Group, LLC
Oaktree Capital Group Holdings, L.P.
Oaktree Capital I, L.P.
Oaktree Capital II, L.P.
Oaktree AIF Investments, L.P.
--Long-term IDR at 'A'.
Oaktree Capital Management, L.P.
--Long-term IDR at 'A';
--Senior unsecured debt at 'A'.
The Rating Outlook is Stable.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 30, 2018|
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