DBRS Morningstar Confirms Antares Holdings LP at BBB (high); Trend 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 is 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 (CPP Investments – rated AAA with a Stable trend by DBRS Morningstar) ownership stake of approximately 83% in Antares.

KEY RATING CONSIDERATIONS
The ratings consider the Company’s strong franchise in lending to sponsored-backed U.S. middle market companies, solid earnings power, disciplined credit risk management and sound capitalization. The ratings also consider the Company’s primary reliance on secured forms of funding, along with the heightened market competitiveness and fragmentation in middle market lending. Furthermore, 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 DBRS Morningstar’s expectation that Antares will continue to prudently expand its direct lending portfolio while also capitalizing on fee opportunities in the syndication market and through third-party asset management. Additionally, the Stable trend reflects our expectation that the Company will maintain its sound balance sheet fundamentals and asset quality. Nevertheless, persistent inflationary pressures or an economic spillover from the current geopolitical developments in Europe present a potential downside to our expectations.

RATING DRIVERS
Over the longer-term, sustained earnings generation capacity that encompasses more diversified non-interest revenue streams and solid balance sheet fundamentals would lead to a ratings upgrade. Additionally, a considerable reduction in leverage (defined as debt-to-tangible equity ratio) and/or further funding diversification that substantially reduces balance sheet encumbrance would also result in a ratings upgrade. Conversely, a significant deterioration in credit performance, increased risk appetite and/or a persistently elevated leverage exceeding the Company’s target range would lead to a downgrade of the ratings. Furthermore, 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 also result in a ratings downgrade.

RATING RATIONALE
The Company’s strong franchise stems from its defendable and leading position as a lender, arranger and syndicator to sponsored-backed U.S. middle market companies. Antares’ franchise is bolstered from its deep industry expertise attained over the course of more than 25 years, as well as from long established relationships with over 400 private equity sponsors and syndication partners, including asset managers, mutual funds, insurance companies, hedge funds and banks. The Company endeavors to diversify its franchise and product breadth by gradually expanding its asset management platform. Supportive of Antares’ franchise is its seasoned senior management team with substantial industry experience that has navigated through multiple challenging economic environments. As of December 31, 2021 (YE21), the Company had nearly $23 billion in total assets and $50 billion of capital under management and administration.

The Company has solid earnings power underpinned by resilient revenue generation, good expense control and sound loss absorption capacity. For 2021, Antares reported robust operating results driven by the strong increase in spread revenue, aided by accelerating loan portfolio growth and lower funding cost. Meanwhile, fee income comprised mostly of syndication fees were substantially higher year-over-year (YoY) due to the rebound in sponsored-backed middle market loan origination volume relative to 2020’s reduced levels as a result of the pandemic. Additionally, revenue in 2021 was boosted from equity investment gains due to the increased number of deals and market activity. Operating expenses increased YoY but at a slower pace relative to total revenues resulting in improved operating efficiency. Antares delivered another year of strong profitability metrics with a return on average assets in the middle single digits and return on average unitholders’ equity in the mid-double digits. For 2022, we expect that likely subdued market loan volume activity, lower equity investment gains along with the rising interest rate environment will be a drag on the Company’s earnings relative to 2021.

We view the Company’s risk profile as solid with a disciplined approach to credit risk and a demonstrated track record of sound risk management capabilities. Antares’s key underlying portfolio features reinforce its asset quality and partially mitigate the inherent riskiness of credit extension to middle market companies. The Company’s loan portfolio is mostly comprised of senior secured positions to a broadly diversified set of sponsor-backed or controlled companies across multiple industries that has exhibited resiliency in various economic cycles. Indeed, since the onset of the pandemic sponsors’ support has remained robust to borrower companies which has been beneficial to Antares’ portfolio asset quality. Nevertheless, during broader and deeper future economic downturns sponsors may have to be more selective in their support for their portfolio companies. Furthermore, a significant portion of the Company’s generated deal volume is driven by existing customer relationships (nearly 80% of the deals closed in 2021) where it already has more established and deeper credit insights. Meanwhile, Antares’ position as a lead agent in most of its lending activities supports its ability to successfully workout problem loans when necessary. In 2021, the Company’s credit performance improved further from the slight uptick that occurred at the earlier stages of the pandemic with non-accruals at YE21 and net charge-offs down from the prior year. For 2022, we anticipate the Company’s asset quality to remain solid and within normalized levels.

Antares’ core reliance on secured forms of funding which encumbers its balance sheet constitutes a ratings constraint. Nevertheless, the Company has made significant progress in enhancing its funding diversification over the past five years by completing nine collateralized loan obligations (CLO) transactions and five senior unsecured debt issuances with the most recent issuance being $550 million of five year senior notes in January 2022. Over the past few years, funding has migrated from being solely reliant on secured bank credit facilities to CLOs accounting for 45% of the Company’s funding mix, unsecured debt accounting for 9%, and bank credit facilities for the remainder at YE21. We view liquidity as being acceptable and appropriately managed as Antares focuses on aligning its funding sources with its uses to limit rollover risk while maintaining sufficient liquidity to endure through times of market stress. At YE21, Antares had over $4.4 billion of available liquidity including available borrowing capacity under its credit facilities and unrestricted cash, well in excess of its available to be drawn unfunded commitments. Meanwhile, the debt maturities are well-laddered with less than 3% of debt outstanding at YE21 maturing over the following two years, nearly 28% between three to four years while 69% matures in more than five years.

The Company maintains sound capitalization with an ample cushion to absorb losses that is also supported by consistent capital generation and disciplined capital management. At YE21, the tangible common equity-to-tangible assets ratio was strong at 24.9% while debt-to-tangible common equity at 2.9 times (x) remains within Antares’ target range of 2.5x to 3.0x. In 2021, the Company resumed its capital distributions following a de minimis payout in the preceding year due to the pandemic driven economic uncertainty. Antares, with the support of its owners, has demonstrated capital management adaptability in order to maintain a solid capital position.

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 in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/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.

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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