Standard & Poor's Ratings Services said it lowered its issuer credit rating on Ares Management (NYSE: ARES) to 'BBB+' from 'A-'. The outlook is stable. At the same time, we also lowered the issue rating on the company's senior unsecured debt to 'BBB+' from 'A-'.

"The downgrade reflects higher expected leverage following Ares' announced plans to merge with Kayne Anderson Capital Advisors L.P., an alternative investment firm with approximately $26 billion of AUM across about 90 funds as of March 31, 2015," said Standard & Poor's credit analyst Trevor Martin.

The company expects the transaction to close in early 2016. Kayne owners will receive $2.55 billion in consideration as a result of the merger. Under the terms of the agreement, Ares will issue between $1.8 billion and $2.05 billion of common equity to fund the majority of the consideration. Ares will finance the rest with cash, primarily through a debt issuance. As a result, we believe the additional debt burden should result in pro forma forecasted leverage, as measured by debt to Standard & Poor's-adjusted EBITDA, of 1.5x-2.0x, within our "modest" financial risk profile assessment (as our criteria define the term).

Kayne is an energy-focused alternative asset manager with a concentration in the midstream energy sector, which we believe reduces its exposure to the volatility in oil and gas prices. The firm has experienced rapid growth in its recent past, with a five-year compound annual growth rate of 27% (as measured by AUM growth). Moreover, 39% of the company's AUM is in permanent capital and 52% has a tenure of seven years or more. Although the proposed merger will benefit Ares' business profile, we believe it is still "satisfactory."

In our opinion, the merger will allow for significant cross-selling opportunities. Ares has more than 600 direct investor relationships, while Kayne has over 2,100 relationships with institutional and high-net-worth clients. We believe there is little overlap in these relationships and that the partnership should provide an opportunity for growth. The transaction will also diversify Ares' business, adding a fifth segment (energy) and increasing its market position slightly in real estate. We view the broadening of the company's platform positively.

The outlook on Ares is stable. This reflects Standard & Poor's expectation that locked-in management fees will continue to support the company's operating costs and that the firm will operate post-merger with modest leverage while continuing to increase its AUM.

We could upgrade the company if it maintains its good fundraising, integrates the businesses smoothly, and achieves debt-to-Standard & Poor's-adjusted EBITDA below 1.5x on a sustained basis. To the extent Ares does not exceed $500 million of additional debt issuance before the merger closes, it would be more likely for the company to operate under our 1.5x threshold for a "minimal" financial risk profile that would potentially result in an upgrade.

We could downgrade the firm if the combined company fails to meet our projections, resulting in forecasted debt to Standard & Poor's-adjusted EBITDA above 2.0x on a sustained basis. We could also downgrade the company if investment performance deteriorates, fundraising weakens substantially, or the companies fail to integrate smoothly, resulting in a disruption to the business.