OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of Fortress Investment Group LLC and its related entities (collectively Fortress) at 'BBB' and affirmed the short-term IDRs at 'F2'. The Rating Outlook is Stable. A complete list of ratings is at the end of this release.

KEY RATING DRIVERS - IDRs AND SECURED DEBT

The rating affirmations reflect Fortress' established position as a global alternative investment manager, experienced management team, stable cash flow generation, very modest leverage and adequate liquidity profile. Ratings are constrained by limited revenue diversity, investment concentrations within its private equity fund and vehicles, higher management fee exposure to net asset value (NAV) relative to peers, underperformance, AUM outflows and executive management changes associated with the announced closure of the macro hedge fund business, and a fully secured funding profile. Ratings are also constrained by 'key man' risk, which is institutionalized throughout many limited partnership agreements and reputational risk, which can impact the company's ability to raise future funds.

Fortress' fee earning assets under management (FAUM) reached a record level of $74.3 billion as of Sept. 30, 2015 (3Q15), up approximately 13% from $66 billion in the third quarter of 2014 (3Q14), driven by strong capital inflows and market appreciation at Logan Circle, in permanent capital vehicles and in credit funds, partially offset by capital distributions in PE funds and a combination of poor performance and redemptions in liquid hedge funds. At 3Q15, approximately 39%% of the management fees that Fortress earned on alternative funds (not including Logan Circle AUM) were based on the NAV of applicable funds. Fitch believes the larger exposure to NAV yields more volatility in Fortress' earnings over time relative to other diversified alternative investment managers whose fees are primarily based on invested capital.

On Oct. 13, 2015, Fortress announced a decision to close the Fortress Macro Funds and managed accounts, and return all capital ($1.8 billion as of 3Q15) to investors by year-end. The decision follows consecutive years of negative performance in 2014-2015 and increasing investor redemptions in 2015. Michael Novogratz, who founded the Liquid Hedge Fund business in 2002, is expected to retire from the firm and its Board of Directors at year-end. The closures, departure of a key executive and preceding losses are negatives from a franchise perspective, but Fitch does not expect a significant impact on overall earnings as the macro business represented only 2% of total Fortress AUM and contributed negative DE in the nine months ended Sept. 30, 2015. Excluding $1.8 billion of remaining AUM related to the Fortress Macro Funds, the Liquid Hedge Funds business had $5.6 billion of AUM at 3Q15, which included $4.5 billion related to an affiliated manager, Graticule Asset Management Asia, L.P., in which Fortress holds a minority interest.

Fortress' operating performance for the trailing 12 months (TTM) ending Sept. 30, 2015 was solid but lower compared to fiscal year (FY) 2014, with consolidated pre-tax distributable earnings (DE) of $384 million compared to $446 million for FY 2014. The decline was primarily attributable to lower investment income and lower management fees in the first half of 2015 (1H15) versus 1H14, partially offset by higher incentive income. Management fees decreased 2.5% to $586.5 million on a TTM 3Q15 basis from $600.9 million in 2014 and, as a percentage of average FAUM, fell to 0.85% on a TTM 3Q15 basis from 0.93% in 2014, well below the five-year average of 1.05% due to AUM growth in Logan Circle funds which garner lower management fees. Lower gross investment income of $26 million on a TTM 3Q15 basis compared to $109 million in 2014 was attributable to fewer investment realizations in the firm's private equity investments since the firm sold its balance sheet investments in GAGFAH SA and Brookdale Senior Living Inc. at significant gains compared to cost in 1H14.

Incentive income on a TTM 3Q15 basis increased 7% to $494.8 million, compared to $460.7 million in 2014, driven by increased realization activity in the credit private equity funds and permanent capital vehicles during 2Q15.

Fee-related earnings before interest, taxes, depreciation, and amortization (FEBITDA), adjusted for deferred management fees, was down 2.2% to $139.5 million for TTM 3Q15, from $142.7 million in 2014, with lower management fees largely offset by lower operating expenses. FEBITDA margin of 23.8% for TTM 3Q15, was consistent with 2014, but has declined in past several years from 30.5% in 2012, a trend that Fitch expects to continue in the near term until AUM growth in PE and Credit segments outweighs the effects of AUM growth at Logan Circle.

Fitch expects stable operating performance for 4Q15 with a strong exit environment providing potential opportunities to realize some of the $0.9 billion of embedded incentive income across the funds and permanent capital vehicles, although Fitch expects full-year earnings to be lower than in 2014, due to the decline in liquid hedge fund FAUM.

Fortress is focusing on reducing the size of its balance sheet by opportunistically monetizing its co-investment portfolio, which measured $1.2 billion at Sept. 30, 2015. As a result of an increasingly balance sheet light strategy, usage of debt has remained low, with $75 million of total debt outstanding at Sept. 30, 2015, in the form of bank revolver draws. Leverage, as measured by gross debt to FEBITDA, was a modest 0.54x for TTM ending 3Q15, compared with 0.51x at YE14, and is the lowest among Fitch-rated peers. Interest coverage was strong at 39.3x for TTM 3Q15, as the revolver is attractively priced at LIBOR plus 2.5%. However, Fitch expects leverage to increase in the short-term with the planned issuance of a $155.7 million promissory note in November relating to the repurchase of Class A shares from Mr. Novogratz.

At Sept. 30, 2015, balance sheet cash amounted to $337.1 million, which was more than sufficient to cover $152.6 million of unfunded fund commitments and $75 million of debt outstanding. Fitch believes that Fortress has significant discretion over the timing of funding these commitments. In addition, the company had $75 million of available revolver capacity.

Fortress' new dividend policy, adopted in 2014, involves distributing substantially all of the after-tax distributable earnings from all sources including net management fees, net incentive income, and balance sheet investment realizations. Fitch notes that this policy is consistent with some of the larger alternative investment management peers and views Fortress' conservative debt usage philosophy, modest leverage and adequate liquidity position as sufficient mitigants to this payout policy.

FIG LLC is the debt issuing subsidiary of Fortress, which is where the company's bank credit facility is housed. Debt issued from FIG LLC is joint and severally guaranteed by the other fee generating entities within the Fortress operating group, thereby subordinating all general partner interests to those of debtholders. The 'BBB' rating assigned to FIG LLC's secured debt is equalized with Fortress' IDR, reflecting its average recovery prospects, given the fact that it is fully secured by substantially secured by substantially all of Fortress' assets as well as its rights to fees from the Fortress Funds and its equity interests therein.

The Stable Rating Outlook reflects Fitch's expectations for positive net fund flows, stable management fees, and stable FEBITDA generation, which will yield moderate leverage and adequate debt service for the rating category.

RATING SENSITIVITIES - IDR and SECURED DEBT
Positive rating momentum could result from continued FAUM growth, operating consistency, further revenue diversity, and additional funding flexibility through access to unsecured debt, while maintaining conservative leverage and liquidity postures.

Conversely, negative rating pressure could result from a reduction in management fees resulting from significant redemption activity, material declines in asset values, and/or an inability to raise follow-on funds, a diminished liquidity profile, or materially higher leverage.

The secured debt rating is equalized with Fortress' IDR and therefore, would be expected to move in tandem with any changes to Fortress' IDR.

Fortress Investment Group, LLC, a Delaware incorporated limited liability company, is a global alternative investment manager specializing in private equity, credit funds, permanent capital vehicles and hedge funds. As of Sept. 30, 2015, AUM amounted to $74.3 billion. The company's stock is listed on the NYSE under the ticker 'FIG'.
Fitch has affirmed the following ratings:

Fortress Investment Group LLC
Fortress Operating Entity I L.P.
Principal Holdings I L.P.
--Long-term IDRs at 'BBB';
--Short-term IDRs at 'F2'.

FIG LLC
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'.

The Rating Outlook is Stable.