Fitch Expects to Rate Blackstone Group's Unsecured Notes 'A+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to assign a rating of 'A+' to the EUR300 million, 10-year, 2% unsecured debt issuance from Blackstone Holdings Finance Co. L.L.C. Proceeds are expected to be used for general corporate purposes, including the funding of balance sheet co-investment commitments and potential acquisition opportunities, particularly within the Eurozone area.

KEY RATING DRIVERS

The expected rating reflects that the new notes are expected to rank equally with existing unsecured debt and benefit from a joint and several guarantee from The Blackstone Group L.P., and Blackstone Holdings I, II, III, and IV L.P. (collectively Blackstone Holdings), which collect all management fees, incentive income, and investment income of the firm.

The ratings for Blackstone reflect its strong competitive position as a global alternative asset manager, experienced management team, solid investment track record, significant fee-earning assets under management (FAUM), incentive income-generating capability, ample liquidity, relatively low leverage, and subordination of general partner interests to outstanding indebtedness.

On April 27, 2015, Blackstone issued $350 million of 30-year notes with a 4.45% coupon. That issuance pushed the firm's leverage ratio, as calculated by debt relative to fee related earnings before interest, taxes, depreciation and amortization (FEBITDA) from 1.92 times (x) at March 31, 2015, on a trailing 12 month basis, to 2.24x, all else equal. This EUR300 million debt issuance will push the firm's leverage ratio further, to approximately 2.54x, on a pro forma basis, assuming an exchange rate of $1.13/EUR. This higher leverage ratio remains below the peer average and is only slightly above Fitch's general tolerance of 2.5x for alternative asset managers (AAMs) in the 'A' category. Fitch believes the firm's leverage will decline in coming quarters, with continued FEBITDA expansion.

The firm's Stable Rating Outlook reflects Fitch's expectations that management will continue to generate stable management fees, maintain strong operating margins, grow/retain FAUM through the raising of new and expansion of existing funds, albeit at a more moderate pace, operate with relatively low leverage, and retain a solid liquidity profile in order to fund operations and meet co-investment commitments to the funds.

Fitch's outlook for the sector is also stable; reflecting the relative stability of core operating fundamentals, given the locked-in nature of a large portion of fee revenue, modest but moderately increasing 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 AAMs with strong franchises such as those included in Fitch's peer review.

However, AAMs have a significant amount of capital to invest at a time when credit markets are competitive and valuations are high. 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.

RATING SENSITIVITIES

The expected rating of the notes is equalized with Blackstone's Issuer Default Rating (IDR) and therefore is sensitive to changes in Blackstone's ratings.

Negative rating actions for Blackstone could be driven by material changes in operating strategy or leverage tolerance resulting from changes in senior management or declines in investment performance which adversely impact the business franchise, meaningful FAUM and margin contraction which impairs FEBITDA, reduced product line diversity, sustained increases in leverage above Fitch's investment grade tolerance, and/or impairment of the liquidity profile as it relates to operating needs, debt maturities, and co-investment commitments.

Legislative risk and/or prolonged market disruptions that impact the ability to fundraise or arrange attractive exit opportunities could yield negative rating momentum for the industry overall.

Positive rating momentum is considered relatively limited, given the nature of the business and the company's existing risk profile.

Blackstone, a Delaware incorporated limited partnership, is a leading global alternative investment manager specializing in private equity, real estate, credit funds, and hedge fund solutions. As of March 31, 2015, FAUM amounted to $223.5 billion and total AUM was $310.5 billion. The company's stock is listed on the NYSE under the ticker 'BX'.

Fitch has assigned the following expected rating:

Blackstone Holdings Finance Co. L.L.C.

--Unsecured debt at 'A+(EXP)'.

Fitch currently rates Blackstone as follows:

The Blackstone Group L.P.

Blackstone Holdings I, II, III, and IV L.P.

--Long-term IDR at 'A+;

--Short-term IDR at 'F1'.

Blackstone Holdings Finance Co. L.L.C.

--Long-term IDR at 'A+;

--Short-term IDR at 'F1';

--Unsecured debt at 'A+'.

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

Applicable Criteria and Related Research:

-- 'Global Non-Bank Financial Institutions Rating Criteria' (April 2015);

-- 'U.S. Alternative Asset Managers: An Industry Update' (November 2014).

Applicable Criteria and Related Research:

Global Non-Bank Financial Institutions Rating Criteria

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

U.S. Alternative Asset Managers: An Industry Update (Realizations, Redeployment and Retail Among Key Trends)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=808228

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984509

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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]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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