DBRS Morningstar Revises Antares’ Trend to Stable from Negative; Confirms Ratings at BBB (high)

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 Stable from Negative. 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 (CPP Investments – rated AAA with a Stable trend by DBRS Morningstar) ownership stake of approximately 83% in Antares.

KEY RATING CONSIDERATIONS
The ratings confirmation and revision of the ratings trend to Stable reflect Antares’ demonstrated operating resiliency despite the economic headwinds as a result of the Coronavirus Disease (COVID-19) induced downturn. We view the Company as well positioned to capitalize on the ongoing economic expansion and the increasing confidence in the middle market space as the pandemic-driven uncertainty subsides. The ratings also consider the Company’s strong franchise and entrenched relationships in the sponsored-backed U.S. middle market, sound earnings power, disciplined credit risk management and loan workout capabilities, as well as sound capitalization. The ratings also contemplate the Company’s primary reliance on secured forms of funding as well as the increasingly competitive environment in the direct middle market lending space. Lastly, we view implicit support from CPP Investments as likely resulting from its substantial ownership stake in Antares that currently represents CPP Investments’ second largest investment.

The Stable trend reflects our expectation that Antares will continue to prudently expand its direct lending portfolio and its fee-based businesses while maintaining sound balance sheet fundamentals and asset quality. The Stable trend also contemplates the moderate scenario of DBRS Morningstar’s global macroeconomic scenarios published March 17th, 2021, which points to strong U.S. economic growth for 2021, buffered by government stimulus and central bank actions that should support healthy middle market activity.

RATING DRIVERS
Sustained earnings generation resiliency accompanied with diversified revenue streams and sound balance sheet fundamentals would lead to a ratings upgrade. Conversely, a persistent weakening in earnings power or a prolonged deterioration in credit performance accompanied by sustained leverage above its target range would lead to a downgrade of the ratings. Additionally, while not anticipated, a divestiture or a substantial reduction of CPP Investments’ ownership stake in Antares signaling CPP Investments’ diminished interest in being a long-term partner and capital provider to the Company, would result in a ratings downgrade.

RATING RATIONALE
Antares’ strong franchise benefits from its leading position as a lender, arranger and syndicator to sponsor-backed companies in the U.S. middle-market with $30.8 billion of capital under management and administration at December 31, 2020 (YE20). The Company’s franchise is supported by its scale, extensive expertise and entrenched sponsor and investor relationships. Further, Antares’ gradually expanding asset management and capital market platforms complement its broad origination capabilities and further diversify its franchise and product breadth. The Company’s franchise is also bolstered by its seasoned senior management team with substantial industry experience that has successfully navigated Antares and its predecessors through various economic cycles.

Antares has sound earnings power, driven by a resilient revenue generation, good operating efficiency and loss absorption capacity that result in attractive profitability metrics. Despite the earnings contraction and the challenging market environment caused by the pandemic-driven fallout in 2020, the Company still managed to grow its loan portfolio while delivering sound profitability with a return on average assets in low single digit and return on average equity in high single digits. Even though spread income that accounts for most of the Company’s revenue increased modestly in 2020, syndication fees declined year-over-year (YoY) due to the lower sponsor-backed middle market loan volume. Further, fewer equity investment sales due to the depressed deal activity during 2020 were also a drag on revenue. Positively, market loan volumes improved significantly in 4Q20 with sustained momentum through 1Q21. Meanwhile, Antares’ expanding asset management platform and associated fees continue to gradually enhance the diversification of its revenue streams. The operating efficiency remains solid although total expenses increased in 2020 mainly due to one-time items, partially offset by a decline in other operating expenses. We expect the improving U.S. economic outlook to be supportive of the Company’s earnings trajectory for this year.

DBRS Morningstar considers Antares’ risk profile as solid which encompasses a proven track record and a disciplined approach to credit and operational risk management. The Company’s embedded portfolio attributes are supportive of the underlying asset quality in the inherently riskier middle market lending space. Antares’ portfolio is entirely comprised of private equity sponsored companies, with mostly senior secured positions across a highly diversified pool of sponsors, borrowers and industries. The pandemic induced fallout on the Company’s portfolio has been partially mitigated by the largely supportive stance of sponsors to borrower companies, as well as from Antares’ heightened monitoring and risk containment. In 2020, the Company’s net charge-off rate increased modestly from the prior year but remains within normalized levels. The non-accruals at YE20 were higher YoY, yet improved in 4Q20 relative to 3Q20. The non-accruals are mostly comprised of companies in sectors that were adversely impacted by the pandemic and thereby the widespread reopening of the U.S. economy, the strong economic growth and continued sponsor support could be beneficial to the portfolio’s credit performance.

The Company’s primary reliance on secured forms of funding, resulting in balance sheet encumbrance is a ratings constraint. Nonetheless, over the past four years, Antares has made notable strides in further diversifying its funding mix away from secured credit facilities by adding collateralized loan obligations (CLO) and unsecured debt funding. Specifically, following its inaugural senior unsecured debt issuance in 2018, Antares completed an additional issuance of $215 million in May 2020 and another issuance of $500 million in January 2021. Further, the Company has completed eight CLO transactions for a total of $6.2 billion. Antares’ target funding mix contains an increasingly higher proportion of CLO and unsecured debt funding over time. The Company’s liquidity management entails an alignment of funding sources with its uses to minimize rollover risk while ensuring there is adequate liquidity to cope in times of stress. At YE20, Antares had approximately $3.2 billion of available liquidity including available borrowing capacity under its credit facilities, cash and short-term marketable securities.

Antares’ sound capitalization is supported by resilient capital generation capacity. The Company’s capital levels provide ample loss absorption capacity, while its capitalization ratios are appropriately aligned with its risk profile. At YE20, the tangible common equity-to-tangible assets ratio was strong at 23.9% while the leverage ratio (debt-to-tangible equity) at 3.1 times (x) slightly exceeded its target leverage ratio of 2.5x-3.0x, on a transitory basis, as the Company capitalized on attractive investment opportunities in 4Q20. Antares has historically applied a disciplined capital management approach and has proven flexibility, with the support of its owners, to retain capital as it recently demonstrated for 2020 due to the pandemic related economic uncertainty.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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 29, 2020), which can be found on our website under methodologies and criteria: https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions.
Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021):
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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. 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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