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 confirmation reflects the Company’s strong franchise and entrenched relationships in the sponsored-backed U.S. middle market, strong earnings power, disciplined credit risk management and sound capitalization. Given the heightened economic uncertainty the ratings contemplate the potential yet selective support of private equity sponsors to portfolio companies along with Antares’ proper liquidity relative to unfunded commitments and upcoming debt maturities. The ratings also consider the Company’s primary reliance on secured forms of funding and its largely concentrated business model in the middle market direct lending space. Lastly, we view implicit support from CPP Investments as likely resulting from its substantial ownership stake in Antares that represents CPP Investments’ second largest investment.

The Stable trend reflects our expectation that Antares will continue to generate solid operating results while maintaining sound balance sheet fundamentals. The Stable trend also contemplates a modest deterioration in credit performance metrics from the recent favorable credit trends. Nevertheless, a contraction in U.S. economic activity as a result of the Fed’s tightening measures or a potential spillover from the recent turmoil in the banking sector present key downside risks to our expectations.

RATING DRIVERS
Sustained earnings generation resiliency accompanied by diversified revenue streams and a meaningful reduction in leverage (defined as debt-to-tangible equity ratio) or balance sheet encumbrance would result in a ratings upgrade. Conversely, a material deterioration in credit performance metrics and/or high leverage exceeding the Company’s target range for a prolonged period 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 defendable position as a leading lender, arranger and syndicator to sponsor-backed companies in the U.S. middle-market with $25 billion in total assets and $60 billion of capital under management and administration at December 31, 2022 (YE22). The Company’s franchise is supported by its scale, extensive expertise with its nearly three-decade industry presence and by the long-entrenched sponsor and investor relationships. Additionally, Antares has been gradually diversifying its franchise and product breadth by a growing asset management platform that complements its broad origination capabilities. Antares’ franchise is also underpinned by a seasoned senior management team with significant industry experience that has successfully navigated the Company and its predecessor entities through various economic cycles.

The Company’s strong earnings power is supported by solid revenue generation, good operating efficiency and loss absorption capacity. For 2022, the Company generated strong spread revenue growth driven by net interest margin expansion as base rates increased substantially and a double-digit percent increase in average loans outstanding. Nonetheless, lower syndication fees as a result of the industry-wide decline in sponsor-backed middle market loan volumes along with notably lower gains from equity investment realizations due to the diminished deal activity drove a modest contraction of reported earnings relative to the prior year. Positively, the fees associated with the Company’s expanding asset management platform increased significantly over the past year increasing revenue diversification. Antares’ profitability metrics remained strong with a return on average assets in the low-to-middle single digits and return on average unitholders’ equity in the low-to-middle double digits. For 2023, the Company’s spread income should modestly benefit from higher interest rates but a continued unevenness in market volumes along with potentially higher loan loss provisions may add downward pressure to operating results.

Antares’ risk profile is considered solid which incorporates a disciplined approach to credit and operational risk management evidenced through a track record of good asset quality. While the Company extends credit to the inherently riskier middle market space, its key portfolio features partially mitigate such risks. Specifically, Antares’ portfolio is highly diversified among sponsors, borrowers and industries and it is predominantly comprised of senior secured loans to private equity sponsored companies. During times of economic stress, even though sponsors may be selective, they have demonstrated an ability to provide additional capital and support to their portfolio companies to protect their equity investments reducing to some extent Antares’ credit risk exposures. Antares’ asset quality also benefits from the substantial deal volume it generates from existing borrowers (approx. three-fourths in 2022, based on unique deal count) where it already has established credit insights. During 2022, the Company’s overall credit risk remained fairly stable while at YE22, non-accruals were lower relative to the prior year period.

The Company’s primary reliance on secured forms of funding, resulting in balance sheet encumbrance is viewed as a ratings constraint. With that said, over the past six years Antares has substantially diversified its funding mix from just solely comprising of secured credit facilities to also include collateralized loan obligations (CLOs) and unsecured debt. Specifically, Antares has completed 10 CLO transactions, including the March 2023 issuance of $493 million as well as five senior unsecured debts issuances totaling approximately $2.0 billion. At YE22, CLOs accounted for approximately 43% of Antares’ funding, unsecured debt accounted for 12%, and secured credit facilities with commitments from a well-diversified group of financial institutions comprised the remainder of its funding. With approximately $3.9 billion of available liquidity, including cash on hand and available borrowing (subject to eligible collateral) under its credit facilities, Antares has adequate capacity to cover its unfunded commitments and the nearly $350 million of outstanding principal under debt facilities with stated maturities in 2023. Of note, the Company has no sizeable debt maturities for 2024 and 2025 as they collectively account for just 2% of its total debt outstanding at YE22.

Antares’ capitalization is sound, supported by resilient capital generation and prudent balance sheet management. The Company has consistently maintained capitalization metrics within its target range providing sufficient cushion to absorb losses. At YE22, the tangible unitholders equity-to-tangible assets ratio was strong at 25.8% while the leverage ratio (debt-to-tangible unitholders equity) at 2.8 times (x) was within its target leverage ratio of 2.5x-3.0x. The Company has a track record of disciplined capital management as well as flexibility, with the support of its owners, to limit or forgo capital distributions and boost its capitalization if deemed necessary in times of economic uncertainty.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions (September 2, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria:: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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