S&P Affirms Ratings on Blackstone (BX), Subsidiaries; Outlook Remains Stable

October 10, 2016 4:27 PM EDT

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S&P Global Ratings said it affirmed its 'A+' long-term issuer credit and senior unsecured debt ratings on Blackstone Group L.P. (NYSE: BX) and operating subsidiaries Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P., and Blackstone Holdings IV L.P. The rating outlook remains stable. We also assigned an issuer credit rating of 'A+' on Blackstone Holdings Finance Co. LLC with a stable outlook because we view it as a core subsidiary of Blackstone Group L.P. Furthermore, we are assigning our 'A+' senior unsecured issue rating on Blackstone's recently amended $1.5 billion revolving line of credit.

"The 'A+' rating on Blackstone reflects the company's solid market position as an alternative asset manager, strong brand name, long track record, good investment performance, and minimal leverage," said S&P Global Ratings credit analyst Sebnem Caglayan.

Blackstone's businesses manage private equity funds, real estate funds, hedge funds solutions, and credit businesses. Total assets under management (AUM) were $356.3 billion as of June 30, 2016, up 7% year over year. The growth in AUM was primarily due to $22.1 billion in net inflows and $1.5 billion in market appreciation. Fee-paying AUM was $266.0 billion as of June 30, 2016, an 11% year-over-year increase.

We expect Blackstone to maintain low leverage, with debt to adjusted EBITDA weighted of approximately 0.26x and adjusted EBITDA to interest weighted of approximately 10.5x. As of Dec. 31, 2015, the company's debt to adjusted EBITDA was 0.0x (net cash), while adjusted EBITDA to interest was approximately 9.3x.

Given the depth and breadth of Blackstone's senior management and investment professionals and the diminished key-man risk among its personnel, we now view its management and governance as strong, versus satisfactory previously. We believe management has considerable expertise, experience, and a track record of success in operating all of its major lines of business with no major operational loss within its history.

Based on likely sources and uses of cash over the next 18-24 months, Blackstone has very strong liquidity. Principal sources of liquidity are from funds from operations, a $1.5 billion undrawn revolver, and a recent €600 million debt issuance. Cash and cash equivalents totaled $1.8 billion as of Dec. 31, 2015, and the company had $2.2 billion of other liquid securities as of Dec. 31, 2015. We expect Blackstone's principal uses of liquidity to be distributions to unitholders (which were $3.5 billion in 2015), and we expect a substantial decline in distributions in 2016 and 2017 based on our forecasted decline in distributable earnings in the next two years.

Although the country risk Blackstone faces has increased very slightly in the past year given the company's growing investor exposure in the Middle East, in our view, this is not significant enough to alter our view of its creditworthiness.

The stable rating outlook on Blackstone reflects our expectation that the company will maintain its leading market position and favorable reputation among alternative asset managers we rate, thereby generating strong cash flows from operations to service its outstanding debt in the next 18-24 months. We expect management to sustain the firm's adjusted debt-to-EBITDA multiple well below 1.5x, in line with our current minimal financial risk assessment.

If the company materially releverages its balance sheet such that adjusted debt leverage surpasses 1.5x, and the company suffers a decline in its AUM resulting from weakening investment performance, we could lower the ratings in the next 18-24 months. Additionally, any regulatory development that meaningfully weakens Blackstone's business model or profitability could cause us to lower our rating.

Given the intense competition in the alternative asset management industry and the company's smaller size and scale relative to some of the higher-rated asset managers, we view an upgrade as highly unlikely within the next 18-24 months, even if the company's key credit metrics continue to gradually improve.



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