(The following statement was released by the rating agency)Overview
-- New York-based alternative asset management company FortressInvestment Group
continues to grow its assets under management,increasing its stable and recurring management fee earnings.
-- We are raising our counterparty credit rating on Fortress to 'BBB'from 'BBB-'.
-- The outlook is stable, reflecting our expectation for sound cashgeneration and investment performance.
Rating ActionOn Oct. 9, 2012, Standard & Poor's Ratings Services raised its long-termcounterparty credit rating on FIG LLC to 'BBB' from 'BBB-'. The outlook isstable. FIG LLC is the counterparty to Fortress' funding agreements andguaranteed by various Fortress group entities. Accordingly, we analyze theentire Fortress Investment Group to arrive at our rating on FIG LLC.
The upgrade primarily reflects our view that the firm is focusing onincreasing its fee-paying assets under management (AUM), which reduces thedependence on incentive income over time. Our rating on Fortress reflects thefirm's increasing stable and recurring management fee income from itsprivate-equity and credit funds. Other rating strengths include low leverage,a continually improving funding profile, a sound long-term investment trackrecord, and experienced principals. Internal controls, infrastructure, andgovernance practices are sound. We estimate that EBITDA interest coverage forthe year will strengthen to about 10x and debt leverage will decline to about0.6x.
The active role of the firm's five principals, who manage independentinvestment strategies and control the majority of the voting shares in thecompany, is a factor offsetting Fortress' strengths because it amplifieskey-man risk. We see the illiquidity of Fortress' own fund investments and thehigher exposure to credit and real estate cycles relative to peers asweaknesses that could hurt the firm's performance during downcycles. Theincentive income contribution to distributable earnings remains greater forFortress than for many of its peers. This exposes the firm to potentialearnings volatility, which we view as a weakness.
Fortress has managed private-equity, credit, and "macro" hedge funds, whichtake macroeconomic bets, for more than 12 years. Its performance has reboundedstrongly following the crisis in 2008, and it continues to steadily attractcapital. We expect that Fortress will maintain its place as one of the largestalternative asset management companies in the U.S. as management keeps addingnew investment strategies and steps up distribution efforts as part of itsgrowth strategy.
The stable outlook reflects our view that Fortress will continue to steadilyincrease its fee-paying AUM and that the funds' performance will be in linewith, or even better than, their benchmarks. We also expect the firm will seekto further diversify its revenue streams. We could downgrade Fortress if itsAUM falls to less than $30 billion as a result of weak performance or investorwithdrawals, or if its liquidity, profitability, leverage, or debt-servicingability weakens to speculative-grade levels. We could raise our rating onFortress if fee-paying AUM continues to increase, resulting in a greater sliceof revenue from stable and recurring fee-related earnings. However, we thinkan upgrade is unlikely in the next 12 months.
Related Criteria And Research
-- Rating Private Equity Companies' Debt And Counterparty Obligations,March 11, 2008
-- Counterparty And Debt Rating Methodology For Alternative InvestmentOrganizations: Hedge Funds, Sept. 12, 2006
Ratings ListUpgradedTo FromFIG LLCCounterparty Credit Rating BBB/Stable/-- BBB-/Stable/--Senior Secured BBB BBB-
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