Fitch Expects to Rate Ares Management LLC's Unsecured Notes 'BBB+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to rate Ares Management LLC's new unsecured notes 'BBB+'. The $300 million of notes will be issued from newly created subsidiary Ares Finance Co. II LLC. Issuance proceeds will be used to fund the pending acquisition of Kayne Anderson, announced on July 23, 2015.

Concurrent with the establishment of Ares Finance Co. II LLC, Fitch has assigned this entity an Issuer Default Rating (IDR) of 'BBB+'.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The IDR and expected unsecured debt rating of Ares Finance Co. II LLC are equalized with 'BBB+' ratings assigned to Ares Management LLC's operating group subsidiaries (collectively Ares) and reflect the fact that the new notes will rank equally with all outstanding unsecured debt and benefit from the same joint and several guarantees from the Ares entities, which collect all fee, incentive, and investment income of the firm.

The ratings for Ares reflect its 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.

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 3.31x 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, including the $300 million launched today. If Fitch combines Ares' TTM FEBITDA with Kayne Anderson's annualized first-quarter 2015 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.

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 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 assigned the following:

Ares Finance Co. II LLC

--Long-term IDR of 'BBB+';

--Senior Unsecured Debt of 'BBB+(EXP)'.

The Rating Outlook is Stable.

Existing ratings for Ares are as follows:

Ares Management LLC

Ares Investment Holding LLC

Ares Offshore Holdings, L.P.

--Long-Term IDR of 'BBB+'.

Ares Holdings LP

Ares Domestic Holdings LP

Ares Investments LP

Ares Real Estate Holdings LP

--Long-term IDR of 'BBB+'; and

--Bank Credit Facility of 'BBB+'.

Ares Finance Co. LLC

--Long-term IDR of 'BBB+'; and

--Senior Unsecured Debt of 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com.'

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989418

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989418

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150813005840/en/

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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