Oaktree Capital has had its investment-grade rating raised a notch on the back of the special situations firm’s consistent operating performance despite the challenging economic environment.
Credit-ratings agency Fitch upgraded LA-based Oaktree’s long-term issuer default rating to A from A-minus, putting the firm five notches above junk status.
“The firm’s stable cash flow generation is supported by its superior operating efficiencies, the 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 and a lack of reliance on transaction and monitoring fees for revenue, all of which are credit strengths relative to the peer group,” Fitch said in a statement.
“Fitch also believes the company’s investment strategy and credit focus yields a more liquid underlying portfolio than certain peers which have a greater focus on more traditional private equity investments.
“Additionally, Oaktree’s decision to defer incentive income recognitions until the income is fixed or determinable, all related contingencies have been removed, and collection is reasonably assured reduces clawback risk for the firm.”
Fitch also said Oaktree’s fundraising strategy includes sizing funds based on management’s determination of investment opportunities given the global environment, as opposed to simply increasing fee-earning AUM (FAUM).
“As a result, new funds can be meaningfully smaller than predecessor funds, which can result in revenue and cash flow declines period-to-period. Still, the breadth of the firm’s product offering combined with the variable cost structure mitigates that concern to some extent.
“Furthermore, while Fitch recognizes that approximately 45 per cent of FAUM is in open-end funds and evergreen structures which earn fees based on net asset value, these funds demand a lower fee rate, meaning that, on average, about 23 per cent of Oaktree’s management fees have come from NAV-based vehicles over time (since 2008), which Fitch believes is manageable and comparable to similarly-rated peers,” it added.
The upgrade follows positive third-quarter results from Oaktree, which saw the distressed debt investor swing into year-on-year profit following the loss it made during the same period last year.
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