Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and secured debt rating of Antares Holdings (US LP) at 'BBB'. The Rating Outlook is Stable.

The rating actions follow the Canada Pension Plan Investment Board's (CPPIB) announced sale on Nov. 16, 2016 of a 16% equity stake in Antares to a private fund managed by Northleaf Capital Partners (Northleaf). Northleaf is an independent global private markets manager headquartered in Canada, with more than $9 billion of capital commitments. As part of the transaction, Northleaf and Antares are forming a broader strategic partnership, which will include developing asset management solutions designed for Canadian investors, with Antares serving as an entry point into middle market private credit.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The rating affirmation continues to reflect the one-notch of uplift from Antares' stand-alone credit risk profile of 'BBB-' reflecting Fitch's assessment of implicit support provided by CPPIB. The sale of the 16% stake is incrementally negative given that it reduces CPPIB's ownership of Antares, just over one year since CPPIB acquired Antares. Nevertheless, Fitch continues to believe CPPIB's investment in the company is long-term and strategic in nature, as evidenced by the size of the initial and on-going investments, expected plans for growth and its involvement in the management and design of Antares' capital structure. As part of the transaction announcement, CPPIB also publicly reiterated its commitment to Antares as a strategic, long-term investment. Nevertheless, the sale of an additional stake, particularly one that reduced the CPPIB ownership below or close to 75%, would negatively impact ratings.

While Antares is first and foremost an investment that must meet CPPIB's minimum long-term return thresholds, it is also complementary to CPPIB's stated desire to deploy capital at attractive risk-adjusted returns. The company has continued to increase its involvement in proprietary deals in recent years. Therefore, Fitch believes that CPPIB may provide modest credit or liquidity support to Antares, if necessary, to weather or take advantage of temporary market dislocations. Since the closing of the transaction, the CPPIB has committed additional capital to fund Antares' investment in the Middle Market Growth Program (MMGP); a joint venture with Lone Star Funds.

The rating affirmation also reflects Antares' strong middle market franchise and expansive sponsor relationships, which provide access to ample deal flow, and a consistent and peer-superior middle market underwriting track record through a variety of market cycles. Fitch believes that Antares has a lower-risk portfolio profile than other lenders in the middle market, as evidenced by its focus on senior lending positions, lower portfolio yields (though strong risk-adjusted returns), low portfolio concentrations, minimal exposure to equity investments, and strong asset quality. Other factors influencing the ratings include the firm's consistent earnings performance through economic cycles, a strong and experienced management team, and the strength of the capital markets business, which provides a relatively reliable fee stream and allows for the potential reduction of balance sheet risk in frothier market conditions.

For Antares, the strategic partnership is expected to help the firm expand its asset management capabilities and managed account programs. Antares currently has several long-standing strategic investor programs, where investors commit prior to syndication based on pre-approved eligibility criteria. The increased syndication capacity gives Antares the ability to commit to larger transactions, which improves its ability to win deals and helps to solidify sponsor relationships.

Rating constraints for Antares include higher-than-peer leverage, a fully secured and relatively undiversified funding profile, the potential liquidity and leverage impacts of meaningful draws on portfolio company revolver commitments, and execution risk associated with the on-going separation of Antares from General Electric Capital Corporation (GECC), at a time when GECC is managing the transition of a number of recently announced, large-scale business sales. Antares' transition to a fully stand-alone operational platform includes the purchase and/or creation of a variety of risk management systems, a Treasury department, and other back-office functionality.

The ratings also consider the current aggressive underwriting conditions in the middle market lending space more broadly, given uneven supply/demand dynamics, and the potential for expanded risk appetite associated with Antares' envisioned growth in the unitranche lending space.

The Stable Outlook reflects Fitch's expectation that, over the outlook horizon, Antares will maintain appropriate underwriting discipline, management acumen and capitalization and liquidity levels to navigate the currently competitive middle market lending conditions while managing the execution risks associated with Antares' ownership transition.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT
Positive rating action with respect to Antares' stand-alone credit profile could result from a reduction in leverage, improved funding flexibility, including demonstrated access to the unsecured debt markets and the term securitization markets through a variety of market cycles, an enhanced liquidity profile, including targeted cash balances for working capital needs and/or unsecured revolving capacity, and a continuation of strong operating performance despite higher funding costs, a new capital structure, and a very competitive operating environment. Strong execution of the transition to a standalone company, with no interruption in market position, business relationships, financial reporting and/or risk management functionality, could also contribute to positive rating momentum.

Negative rating actions with respect to Antares' standalone credit profile could result from an increase in leverage, material deterioration in asset quality, an alteration in the perceived risk profile of the portfolio, a weakening liquidity profile, material operational or risk management failures, and/or damage to the firm's franchise which negatively impacts its access to deal flow, sponsor relationships, and syndication capabilities. Negative rating action could also result should CPPIB's ownership interest decrease to, or begin to approach, 75%, or if Fitch believes there has been reduction in the strategic importance of the Antares platform to CPPIB, thereby negatively impacting the potential for support.

Fitch has affirmed the following ratings:

• Antares Holdings LP (US LP)
• --Long-Term IDR at 'BBB';
• --Secured debt at 'BBB'.

The Rating Outlook is Stable.