OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of the various subsidiaries of Apollo Global Management LLC (collectively Apollo) at 'A-'. The Rating Outlook is Stable. Approximately $1 billion of unsecured debt is affected by these actions. A complete list of ratings is detailed at the end of this release.

Today's rating actions have been taken as part of a periodic peer review of the alternative Investment Manager (IM) industry, which comprises seven publicly rated global firms. Fitch's outlook for the sector is stable, reflecting the relative stability of core operating fundamentals, given the locked-in nature of a large portion of fee revenue, modest but increased leverage levels, manageable near-term obligations relative to available liquidity resources, increasing asset under management (AUM) diversity, and investors' increasing allocation to alternative investments, particularly those managed by alternative IMs with strong franchises such as those included in Fitch's peer review. While fund realization activity has increased significantly over the last three years, leading to the amortization of existing AUM, managers have continued to replace capital, and therefore fees, with follow-on funds and expansion into other product categories through step-out strategies, seed investments, and/or acquisitions.

The variable cost structure of the alternative IMs has contributed to relatively steady cash flows through cycles. Fee-related earnings before interest, taxes, depreciation, and amortization (FEBITDA) margins had been trending down in recent years, given lower fee rates on new product categories, higher fundraising costs, and because the cost of doing business has risen with increased regulation and administrative costs associated with operating as public companies. However, FEBITDA margins have turned a corner more recently as many alternative IMs have begun to raise follow-on funds for newer strategies, which adds scale to the platform. The FEBITDA margin for 'A' category alternative IMs averaged 35.5% for the trailing 12 months (TTM) ended Sept. 30, 2015, which compared to a 34.9% average for 2012.

Leverage levels have increased across the industry, as issuers have taken advantage of the low interest rate environment to issue long-duration funding and have also used debt financing for acquisition purposes. Average leverage, defined as debt divided by FEBITDA, was 3.54x for 'A' category firms for the TTM ending Sept. 30, 2015, which compared to an average of 2.55x at year-end 2012. Fitch believes the issuances have been largely opportunistic and views the reduction in refinancing risk favorably. Over time, Fitch expects leverage levels to migrate toward historical averages, as cash proceeds are deployed into FEBITDA-generating opportunities and recent acquisitions begin to contribute to consolidated results.

While core issuer fundamentals remain solid, alternative IMs continue to have record levels of capital to invest at a time when conditions are increasingly challenging. Therefore, there is more capital chasing fewer deals, which could lead to significant fund underperformance if competition bids prices up further. Outsized vintage concentration could potentially exacerbate this issue. While most of the large managers have operated through a variety of market cycles, and have demonstrated investment restraint, pressure for returns from limited partners remains high, given the length of time that interest rates have been at low absolute levels. That said, a meaningful portion of the industry's uncalled capital is not-yet-earning fees, often referred to as shadow AUM, which could provide some material upside to alternative IM FEBITDA as the capital is deployed.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The rating affirmations reflect Apollo's strong competitive position as a global alternative IM; its experienced management team; solid investment track record; large investor base; predictable management fee streams, given significant FAUM and limited exposure to assets that earn fees based on net asset value; incentive income-generating capability; relatively low leverage; solid liquidity; and the subordination of general partner interests to outstanding indebtedness.

Rating constraints for the alternative IM space include '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 asset space.

Rating constraints more specific to Apollo include its large revenue exposure to insurance affiliate Athene Holding Ltd. (Athene), which accounts for a meaningful percentage of management and transaction fees and introduces potential regulatory and reputational risks, execution risk associated with the recently announced investment in the asset management business of AR Capital (ARC) and the acquisition of RCS Capital Corporation's (RCS) wholesale distribution business, the potential for increased leverage, at least temporarily, as a result of the ARC/RCS acquisitions, and lower relative AUM diversity as compared to higher-rated peers.

FAUM amounted to $131.1 billion at Sept. 30, 2015, up about 1.2% year-over-year, as inflows, particularly in credit, outstripped realizations and outflows. The sizeable FAUM base provides for a relatively stable fee stream over time and only a small percentage of FAUM (7.8%) earns fees based on net asset value as of June 30, 2015, although this is expected to increase with the ARC acquisition. Even so, there are meaningful fee concentrations related to Athene and private equity Fund VIII given their sizes. Apollo earns a 40-basis point management fee on about $60.2 billion of Athene assets (at Sept. 30, 2015), which represented 26.5% of run-rate base management fees in third quarter 2015 (3Q15). Fees for Fund VIII should be relatively stable over the next several years, as the fund's investment period has only just begun, but longer term, the fee stream could be challenging to replace as Fund VIII is the largest fund in the firm's history and the largest buyout fund raised since the financial crisis. Fitch believes the potential reduction in private equity management fees, following the end of Fund VIII's investment period, could be offset by fundraising for Apollo's next private equity buyout fund along with organic growth in credit and real estate.

Apollo had approximately $28.7 billion of un-invested capital to put to work at Sept. 30, 2015, at a time when valuations are high and credit market conditions are very competitive. Fitch believes outsized concentrations in current vintages could lead to fund underperformance down the road. Still, Apollo has operated through a variety of cycles and Fitch believes the firm's size, diversity, and global reach should provide for opportunities to invest.

Apollo's core operating performance, as measured by FEBITDA remained solid in 2015, although fee earnings were down year over year given elevated transaction and termination fees in 2014. The FEBITDA margin was approximately 40.1% for the TTM period ended Sept. 30, 2015, which compares favorably to the peer group. Apollo's business really hit scale in 2012, and the firm has been able to maintain peer-superior operating margins for the last six quarters. Fitch would view an extension of this track record favorably.

Apollo continues to generate realized carried interest, although the amount has significantly declined given that the firm's realization cycle started earlier than the peer group. Net realized carried interest was nearly $1.5 billion in 2013, $931 million in 2014, and $207.5 million in the first three quarters of 2015. At Sept. 30, 2015, Apollo had $689 million of carried interest receivable, assuming all funds were liquidated at net asset value. This balance is linked largely to private equity funds, and Fund VII, in particular. While carried interest income is inherently volatile over time, the potential for meaningful incentive income does help support the firm's credit profile.

Fitch believes Apollo's liquidity profile is sound. Apollo's cash balance amounted to approximately $836 million at Sept. 30, 2015, which is more than sufficient to fund the cash investment in the announced acquisitions of ARC and RCS, which amounts to approximately $215 million. The firm also had $500 million of availability on its corporate credit facility. Claims on corporate liquidity include unfunded commitments to the various funds, which were approximately $642 million at 3Q15, although Fitch believes the company has significant discretion over the timing of funding commitments. Apollo distributed approximately 92% of its distributable earnings year-to-date in 2015, which is at the high-end of the peer group, but Fitch believes the firm could reduce its payout ratio to boost its liquidity profile, as necessary.

Apollo's leverage, as measured by corporate debt divided by FEBITDA, was 2.74x at Sept. 30, 2015 on a TTM basis, which was below the 'A' category average. Assuming the cash portion of the ARC/RCS investment ($215 million) is funded with long-term debt, leverage would increase to 3.32x, all else equal. However, the ownership stakes in ARC and RCS would be expected to generate incremental FEBITDA for the firm which would reduce pro forma leverage.

Fitch believes the firm's consolidated leverage ratio will be managed in-line with the agency's general tolerance level for 'A' category firms of 2.5x longer-term. Should debt be issued to fund the cash portion of the acquisition, leverage would be expected to be reduced, post-acquisition, by incremental earnings from the investment, organic growth in the core business, and the realization of scale and distribution benefits from the investment in ARC and RCS. Were this not to be achieved, ratings could be pressured.

The Stable Outlook reflects Fitch's expectations that management will continue to generate stable management and advisory fees, grow/retain FAUM through the raising of new and expansion of existing funds, albeit at a much more moderate pace near-term, sustain recent operating margins, operate with relatively low leverage, and retain a solid liquidity profile in order to meet near-term debt maturities and co-investment commitments to funds.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT

Positive rating momentum could develop from a demonstrated ability to operate at the current size, scale, and margin level over an extended period of time. An increase in fee diversity, lower leverage, and/or stronger liquidity would also be viewed favorably.

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, sustained increases in leverage, and/or impairment of the liquidity profile could result in negative rating action. Furthermore, ratings could be adversely affected if the relationship between Apollo and Athene were to materially change as a result of regulatory scrutiny, outsized fines/penalties, or loss of management or sub-advisory fees. An inability to effectively integrate ARC/RCS and realize the expected acquisition benefits could also yield negative rating momentum.

Apollo is a global alternative investment manager specializing in private equity, credit and real estate. FAUM amounted to $131.1 billion at Sept. 30, 2015 and total AUM was $161.8 billion. The company's Class A shares are listed on the NYSE under the ticker 'APO'.

Fitch has affirmed the following ratings:

Apollo Management Holdings, L.P.
Apollo Management, L.P.
Apollo Capital Management, L.P.
Apollo International Management, L.P.
AAA Holdings L.P.
Apollo Principal Holdings I, L.P.
Apollo Principal Holdings II, L.P.
Apollo Principal Holdings III, L.P.
Apollo Principal Holdings IV, L.P.
Apollo Principal Holdings V, L.P.
Apollo Principal Holdings VI, L.P.
Apollo Principal Holdings VII, L.P.
Apollo Principal Holdings VIII, L.P.
Apollo Principal Holdings IX, L.P.
Apollo Principal Holdings X, L.P.

ST Holdings GP, LLC
ST Management Holdings, LLC
--Long-term IDR at 'A-';
--Unsecured debt rating at 'A-'.

AMH Holdings (Cayman), L.P.
--Long-term IDR at 'A-'.

The Rating Outlook is Stable.