BROOKFIELD OAKTREE HOLDINGS, LLC
Fitch Ratings has assigned an expected rating of 'A(EXP)' to
Debt issuance proceeds are expected to be used for general corporate purposes.
Key Rating Drivers
The expected rating on the new senior unsecured notes is equalized with the ratings assigned to OCM's existing senior unsecured debt as the new notes will rank equally in the capital structure. The unsecured debt rating is equalized with the Long-Term Issuer Default Rating (IDR), reflecting the wholly unsecured funding profile and average recovery prospects for unsecured creditors in a stressed scenario.
The rated
Fitch views this debt issuance as opportunistic, as interest rates remain low on a global basis and investment opportunities have picked up over the past year.
Oaktree's leverage has been elevated relative to historical levels and Fitch's 'a' category benchmark range in recent years, but leverage returned to within the benchmark range in 2021 following an increase in investment opportunities, which drove management fee growth. Leverage, as measured by long-term debt divided by fee-related earnings before interest, taxes, depreciation and amortization (FEBITDA) over the trailing 12 months, amounted to 2.3x at
With an issuance size of
Oaktree's ratings continue to reflect its strong position as a global alternative IM, solid investment track record, experienced management team, large base of fee-earning assets under management (FAUM), strong blended management fee rate, given the absence of a step-down in the management fee percentage once closed-end funds enter their liquidation period, a lack of reliance on transaction and monitoring fees for revenue, incentive income-generating capability, income contribution from Oaktree's minority ownership in
Rating constraints for the alternative IM sector include key person risk, which is institutionalized throughout many limited partnership agreements; reputational risk, which can affect the company's ability to raise future funds; and legal and regulatory risk, which could alter the alternative IM space.
Rating constraints more specific to Oaktree include elevated leverage, which has been above or at the high end of Fitch's 'a' category benchmark range in recent years, and lower-than-peer assets under management (AUM) diversity.
The Stable Outlook for Oaktree's Long-Term IDR reflects Fitch's expectation that management fee growth over the Outlook horizon will allow for a reduction in leverage to below 2.5x by YE 2022 and the maintenance of a FEBITDA margin within Fitch's 'a' category earnings and profitability benchmark range of 30%-50%. The Outlook also reflects Fitch's belief that Oaktree will continue to generate solid investment returns, which will allow the company to grow/retain FAUM through the raising of new and expansion of existing fund strategies and retain a solid liquidity profile in order to fund operations and meet co-investment commitments to the funds.
RATING SENSITIVITIES
The expected unsecured debt rating is primarily linked to changes in the Long-Term IDR and would, therefore, be expected to move in tandem. However, a meaningful increase in the proportion of secured debt in Oaktree's capital structure could result in the unsecured debt rating being notched down from the IDR, given weaker recovery prospects for the debt class.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch believes positive rating momentum for Oaktree is limited over the medium term, given its current rating levels, leverage and the nature and risk profile of the business, including the impact that key person events and/or reputational damage can have on the franchise and future fundraising prospects.
However, positive rating momentum could develop over time from a meaningful reduction in key person risk, an increase in fund and fee diversity, enhanced stability of incentive income through a variety of market cycles, stronger funding diversity and liquidity, and meaningful declines in leverage. To the extent that
Factors that could, individually or collectively, lead to negative rating action/downgrade:
An inability to reduce or maintain leverage below 2.5x by YE22, an impairment in the liquidity profile, declines in investment performance, a key person event, and/or legislative risk that negatively affect the company's ability to raise FAUM and generate fees. To the extent that Oaktree's core business activities, management, strategic objectives, risk appetite, or financial profile materially changes under Brookfield's ownership, this could also pressure the ratings.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONSENTITY/DEBT RATING
senior unsecured
LT A(EXP) Expected Rating
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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