OREANDA-NEWS. August 03, 2015. Fitch Ratings has published a long-term Issuer Default Rating and unsecured debt rating of 'BBB+' for various subsidiaries of Ares Management, L.P. (collectively Ares). The Rating Outlook is Stable. A full list of rating actions is at the end of this press release.

On July 23, 2015, Ares announced its intention to acquire the Kayne Anderson investment management platform for \\$2.55 billion in consideration. As of March 31, 2015, Kayne Anderson had approximately 300 employees and \\$26 billion in assets under management, predominantly focused on energy and energy infrastructure investing. The combined entity is expected to be renamed as Ares Kayne Management, L.P and the transaction is expected to close on or around Jan. 1, 2016.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT

Ares' ratings reflect the firm's solid competitive position as a global alternative investment manager, its experienced management team, solid investment track record, strong and predictable fee-related earnings (FRE), given meaningful fee-earning assets under management (FAUM), relatively stable distributable earnings compared to peers, due to the significant FRE component, and the subordination of general partner interests to outstanding indebtedness.

Rating constraints include lower fee-related EBITDA (FEBTIDA) margins than peers, weaker revenue diversity given a heavier credit concentration, more limited upside from incentive income, modestly higher leverage, and a relatively low level of on-balance sheet liquidity, as measured by cash or liquid securities relative to debt outstanding. Similar to other alternative investment manager ratings, Ares' ratings are also constrained by '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 investment space.

The current ratings contemplate the impact of Ares' announced merger with Kayne Anderson. Fitch believes the merger provides a number of potential benefits to the combined entity, including a broader investment base, with cross-sell opportunities; enhanced predictability of fees over time, given the locked-in nature of the majority of investor capital; and upside potential to the firm's FEBITDA margins, given increased economies of scale and a lower blended compensation ratio. However, any merger/acquisition of this scale comes with the potential for operational and integration issues and Fitch believes it will take some time for the benefits of the partnership to be fully determined. Additionally, the firm's leverage profile will increase over the near term, given contemplated acquisition financing, and Ares' exposure to the energy sector will increase materially. While Kayne Anderson has a long and successful track record in energy investing, current volatility in the sector could yield less predictable cash flow over the near-to-intermediate term given the impact of market movements on net asset value-based fees.

At March 31, 2015, Ares' total debt amounted to \\$385 million, consisting of \\$250 million of public unsecured notes, \\$60 million of corporate revolver draws and a \\$75 million guarantee on the credit facility borrowings of Ares Commercial Real Estate Corporation (ACRE), a publicly traded commercial mortgage real estate investment trust managed by Ares. Based on this debt balance, Fitch calculates the firm's leverage (debt/FEBITDA) to be 3.31 times (x) on a trailing 12 month (TTM) basis, which compared to a peer group average of 2.90x. This baseline calculation excludes the Part I incentive fees Ares earned from Ares Capital Corporation, a publicly traded business development company managed by the firm, and assumes a 60% compensation ratio on that revenue. If the net Part I incentive fees were included in FEBITDA, leverage would be closer to 2.35x, which is below the peer average.

Leverage is expected to increase in the near term with the issuance of up to \\$750 million of acquisition financing. If Fitch combines Ares' TTM FEBITDA with Kayne Anderson's annualized 1Q'15 FRE, leverage increases to approximately 4.36x on a pro forma basis, or 2.68x if net Part I incentive fees are included. Fitch believes leverage will decline over time as operating margins expand and cross-sell opportunities are realized.

At March 31, 2015, Ares' FEBITDA margin (FEBTDA/fee revenue) was 21.9% on a TTM basis, which compares to a peer average that is closer to the mid-30% range. If Ares' TTM results are combined with Kayne Anderson's annualized 1Q'15 results, FEBITDA margins improve to 31.8%, all else equal. Fitch believes there is upside to this ratio from economies of scale, back-office synergies, and cross-sell opportunities as limited partners continue to consolidate investments with the larger asset managers. Fitch believes positive rating momentum could result from a combination of a sustained decrease in leverage and an improvement in FEBITDA margins, both of which would provide the firm with more operating flexibility through market cycles.

Ares' liquidity profile is sound, but weaker than many higher-rated peers that operate in negative net debt positions. At March 31, 2015, Ares had about \\$69 million of balance sheet cash and \\$970 million of borrowing capacity on the corporate revolver, which compared to \\$250 million of long-term debt, \\$60 million of revolver draws, \\$75 million of debt guarantees, and \\$393 million of unfunded commitments. Balance sheet liquidity would be further strained by the additional issuance of up to \\$750 million of acquisition financing, although distributable earnings are expected to grow.

At March 31, 2015, Ares had \\$87 billion of AUM; \\$65.7 billion of which was fee-earning. AUM has expanded at a compound annual rate of approximately 19% since 2004 and will increase to about \\$113 billion following the merger with Kayne Anderson. On a combined basis, approximately 20.5% of the firm's AUM will be invested in permanent capital vehicles, while 54.3% of AUM will have an investment tenor of seven or more years. The locked-in nature of the firm's capital compares favorably to peers and provides for more predictability of fees and cash flows over time.

The Stable Outlook reflects Fitch's expectations that management will continue to generate stable management and advisory fees, grow/retain fee-earning assets under management (FAUM) through the raising of new and expansion of existing funds, sustain operating margins, operate with relatively low leverage, and retain an adequate liquidity profile in order to meet debt service obligations and co-investment commitments to its funds. While Fitch believes there is the potential for positive rating momentum longer-term, it is likely beyond the outlook horizon of 12-24 months, given the time to absorb the Kayne Anderson acquisition.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT
Positive rating momentum could be driven by improved FEBITDA margins, increased fee revenue diversity, stronger balance sheet liquidity levels, the sustained maintenance of leverage below 2.5x, and the realization of merger benefits with Kayne Anderson, including leveraging the broader investor base into overall FAUM growth. Strong performance in current vintage energy investments would also be viewed favorably, given the choppy market environment.

Negative rating actions could result from material declines in investment performance, a key man event, and/or legislative risk which negatively impact the company's ability to raise FAUM and generate fees, meaningful increases in leverage, further weakening of the liquidity profile, and/or integration issues with the Kayne Anderson merger which negatively impact ongoing business operations.

Fitch has published the following ratings:

Ares Management LLC
Ares Investment Holding LLC
Ares Offshore Holdings, L.P.
--Long-term IDR 'BBB+'.

Ares Holdings LP
Ares Domestic Holdings LP
Ares Investments LP
Ares Real Estate Holdings LP
--Long-term IDR 'BBB+';
--Bank credit facility 'BBB+'.

Ares Finance Co. LLC
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+'.

The Rating Outlook is Stable.