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TEXT-Fitch affirms Fortress Investment IDR at 'BBB'
February 29, 2012 / 4:03 PM / 6 years ago

TEXT-Fitch affirms Fortress Investment IDR at 'BBB'

Feb 29 - Fitch Ratings has affirmed the long-term Issuer Default
Ratings (IDR) of Fortress Investment Group LLC and its related entities
(collectively Fortress) at 'BBB' and affirmed the short-term IDRs at 'F2'. The
Rating Outlook is Stable. Approximately $261.3 million of secured debt is
affected by these actions. A complete list of ratings is detailed at the end of
this release.	
	
The ratings affirmation reflects Fortress' competitive position as a global
alternative asset manager, experienced management team, stable cash flow
resulting from the contractual nature of its management fees, relatively modest
leverage, and the subordination of general partner interests to outstanding
indebtedness.	
	
Ratings are constrained by 'key man' risk, which is institutionalized throughout
many limited partnership agreements; reputational risk, which can impact the
company's ability to raise future funds; limited revenue diversity;
concentration of investments within many private equity (PE) fund vehicles;
management fee exposure to net asset value (NAV) movements, which Fitch believes
will yield higher management fee volatility over time relative to peers; and
secured funding profile.	
	
Fortress' fee-earning assets under management (FAUM) amounted to $43.7 billion
at Dec. 31, 2011, down 2.0% from year-end 2010, as the reset of Fund V's fee
base combined with fund redemptions and capital distributions outpaced
fund-raising capital deployment. Still, management fees rose 8.2% with capital
deployment in credit private equity funds, fundraising in liquid hedge funds,
and $14.7 million of fees received from a short-term advisory contract.
Incentive income fell 46.3% from a very strong 2010, with weaker performance in
hedge funds and reduced realization activity in credit PE funds. Fitch expects
relatively flat fee performance in 2012 as the company focuses on fund
realizations and capital deployment ahead of the next general PE fund raise.	
	
Fitch recognizes that incentive income can be highly variable, so instead
focuses on management fee cash flows for debt repayment. FEBITDA (calculated as
management fees less operating expenses and non-incentive compensation plus
depreciation and amortization) was down 8.5% in 2011 due entirely to a $22
million reduction for the deferment of management fees. For debt covenant
purposes, Fortress must deduct management fees that are more than six months
delinquent from its calculation of cash flows. Fitch believes the funds have the
capacity to pay the fees, but are waiting for improved market conditions to
generate liquidity. Adjusting for the deferral, FEBITDA was up 5.0% from 2010.	
	
For leverage calculations, Fitch uses long-term debt divided by FEBITDA.
Leverage remained relatively modest in 2011, amounting to 1.75 times (x) at
year-end, compared to 1.70x at year-end 2010, as a $16.5 million decline in debt
outstanding was offset by a reduction in FEBITDA. Debt service coverage, as
measured by FEBITDA/interest expense, was relatively flat at 8.07x for 2011
compared to 8.27x in 2010 and a longer-term average of 7.08x. This level of debt
service coverage is considered adequate for the rating category. Fitch
recognizes that coverage ratios would be more robust if incentive income earned
were included over time.	
	
Fitch believes Fortress has a solid liquidity profile. At Dec. 31, 2011, balance
sheet cash amounted to $333.2 million, borrowing capacity on the corporate
revolver was $56.7 million, and balance sheet co-investments in managed funds
amounted to $1.08 billion. This compares to $101.3 million of outstanding
co-investment commitments to the funds, $89.5 million of debt amortization
requirements in 2012, including the April cash flow sweep, and a $66 million
potential clawback obligation, assuming all funds are liquidated at net asset
value (NAV).	
	
The Stable Rating Outlook reflects Fitch's expectations for positive net fund
flows, modest management fee growth, and stable FEBITDA generation, which will
yield moderate leverage and adequate debt service for the rating category.	
	
Positive rating momentum could result from reliable FAUM growth, operating
consistency, further revenue diversity, enhanced liquidity, additional funding
flexibility, and/or reduced leverage.	
	
Conversely, negative rating action could result from a reduction in management
fees, resulting from significant redemption activity, material declines in asset
values, and/or an inability to raise follow-on funds, a diminished liquidity
profile, higher leverage, and/or potential political and regulatory risks that
reduce investors' allocation to alternative investments.	
	
Fortress is a global asset manager with approximately $43.7 billion of FAUM at
Dec. 31, 2011, consisting of PE funds, liquid hedge funds, credit funds, and
traditional asset management funds. Fortress was founded in June 1998 and went
public in February 2007. The company's stock is listed on the NYSE under the
ticker 'FIG'.	
	
Fitch has affirmed the following with a Stable Outlook:	
	
Fortress Investment Group LLC	
-- Long-term IDR at 'BBB';	
-- Short-term IDR at 'F2'.	
	
Fortress Operating Entity I L.P.	
-- Long-term IDR at 'BBB';	
-- Short-term IDR at 'F2'.	
	
Principal Holdings I L.P.	
-- Long-term IDR at 'BBB';	
-- Short-term IDR at 'F2'.	
	
FIG LLC	
-- Long-term IDR at 'BBB'; -- Short-term IDR at 'F2';	
-- Secured debt at 'BBB'.	
	
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable Criteria and Related Research:	
-- 'Global Financial Institutions Criteria' (Aug. 16. 2011); and -- 'Investment
Manager and Alternative Funds Criteria' (Dec. 23, 2011).	
	
Applicable Criteria and Related Research:	
Global Financial Institutions Rating Criteria	
Investment Manager and Alternative Funds Criteria

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