Reuters logo
Fitch Places Och-Ziff's 'BBB-' Ratings on Negative Watch Following FCPA Settlement
September 30, 2016 / 4:31 PM / a year ago

Fitch Places Och-Ziff's 'BBB-' Ratings on Negative Watch Following FCPA Settlement

(The following statement was released by the rating agency) NEW YORK, September 30 (Fitch) Fitch Ratings has placed its 'BBB-' Long-Term Issuer Default Rating (IDR) and 'BBB-' senior unsecured debt rating for Och-Ziff Capital Management LLC (OZM) and its subsidiaries on Rating Watch Negative. See the full list of rating actions at the end of this release. KEY RATING DRIVERS IDR AND SENIOR UNSECURED DEBT The Rating Watch Negative follows yesterday's announcement that OZM has entered into a settlement with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) regarding violations of the Foreign Corrupt Practices Act (FCPA). The settlement includes a $412 million fine and deferred prosecution agreement for OZM and a guilty plea by one of OZM's subsidiaries, OZ Africa Management GP LLC. OZM's founder, Daniel Och, also agreed to pay a $2.2 million fine related to record-keeping violations, while OZM's CFO, Joel Frank, agreed to pay a yet-to-be-determined fine related to record-keeping violations. The Rating Watch Negative indicates a heightened probability of potential negative rating action over a shorter period of time relative to the Negative Outlook previously assigned to OZM. While OZM's parent company avoided a guilty plea as part of the settlement, Fitch believes that the guilty plea by its subsidiary, OZ Africa Management GP LLC, and the administrative settlements agreed to by Daniel Och and Joel Frank could potentially contribute to reputational damage for the overall firm and result in near-term assets under management (AUM) outflows. Fitch also notes that OZM may potentially experience increased fee pressure and fundraising challenges as a result of the settlement. Fitch expects that OZM's elevated legal expenses should begin to normalize, albeit with some lag, following the settlement. However, potential AUM outflows would pressure OZM's management fees and thus its cash flow leverage and interest coverage metrics. OZM is further challenged by lackluster short-term investment performance, with year-to-date (YTD) returns of 0.36% for OZ Master Fund. The multi-strategy hedge funds represent more than 50% of OZM's total AUM. As of Aug. 31, 2016, OZM's funds experienced $5.5 billion in AUM net outflows, representing a 12.1% decrease since the end of 2015. The financial settlement and other liquidity needs are expected to be managed via cash on hand ($368.2 million as of second quarter 2016 ), retained earnings (as was retained in 1H16) and the previously announced $400 million partner capital contribution in the form of perpetual preferred units. Fitch expects the proceeds of the partner capital contribution to be used, over the near term, to pay down the $120 million draw on the revolving credit facility that was outstanding as of 2Q16. Fitch views the partner capital contribution and the paydown of the revolving credit facility as important mitigants to immediate rating pressure. OZM's leverage, as calculated by debt/FEBITDA increased to 4.0x for the trailing 12 months (TTM) ending 2Q16 from 2.7x for TTM 1Q16 and 2.3x in 2015. Between 2011 and TTM 3Q15, Fitch-calculated leverage was under 2.0x. Pro forma for the repayment of the revolver and a normalization of non-compensation expenses, Fitch estimates that OZM's leverage would have been 2.8x at 2Q16. That said, material outflows would pressure this ratio. OZM's interest coverage, as calculated by FEBITDA divided by interest expenses decreased to 6.4x for the TTM ending 2Q16 from 7.8x for TTM 1Q16 and 9.3x in 2015. Between 2011 and TTM 3Q15, Fitch-calculated interest coverage was in excess of 30.0x. Pro forma for the repayment of the revolver and a normalization of non-compensation expenses, Fitch estimates that OZM's interest coverage would have been 8.6x at 2Q16. Material outflows would similarly pressure this ratio. Fitch would view sustained debt/FEBITDA in excess of 3.5x or interest coverage below 5.0x as negative rating drivers. OZM's IDR is supported by its long-term performance track record, particularly in the firm's core multi-strategy hedge fund business; acceptable long-run leverage and interest coverage metrics; strong core profitability; and a seasoned management team. Key rating constraints beyond those articulated in the Negative Watch rationale above include the elevated level of market risk due to the meaningful amount of net asset value-based management fees; key man risk associated with the firm's founder and CEO, Daniel Och; and less diversified, albeit improving, AUM relative to higher-rated alternative investment manager peers. The IDRs assigned to OZ Management LP, OZ Advisors LP and OZ Advisors II LP are equalized with the ratings assigned to OZM, reflecting the joint and several guarantees among the entities. The senior unsecured debt is equalized with OZM's IDR reflecting the expectation of average recovery prospects for the instrument. RATING SENSITIVITIES IDR AND SENIOR UNSECURED DEBT Ratings could be downgraded by one or more notches if the settlement and/or investment underperformance result in material AUM outflows over the next six months. More specifically, outflows, fee pressure and/or elevated expenses which translate into sustained leverage above 3.5x, interest coverage below 5.0x or materially reduced liquidity resources would contribute to negative rating action. Ratings may also be downgraded if fundraising capability is materially impaired or Fitch believes the franchise has experienced permanent reputational damage. OZM's ratings also continue to remain sensitive to a key man event with respect to Daniel Och. The Negative Watch could be revised to a Negative Outlook if the financial impacts, AUM outflows, fundraising capabilities, and/or franchise damage are deemed to be manageable in the context of OZM's financial profile. A stabilization of OZM's investment performance would also contribute to a revision of the Negative Watch to a Negative Outlook. Thereafter, a revision of the Rating Outlook to Stable would be conditioned upon OZM's ability to stabilize (or grow) its AUM, demonstrate stronger investment performance and fee generation, normalize its expense base, and return leverage and interest coverage levels below 3.5x and above 5.0x, respectively. The senior unsecured debt rating is equalized with OZM's IDR and, therefore, would be expected to move in tandem with any changes to OZM's IDR. Were OZM to incur material secured debt, this could result in the unsecured debt being rated below OZM's IDR. OZM is an alternative investment manager with expanding credit and real estate businesses. The firm had $42 billion of AUM with 611 employees in eight offices worldwide as of June 30, 2016. Fitch has placed the following ratings on Rating Watch Negative: Och-Ziff Capital Management Group LLC OZ Management LP OZ Advisors LP OZ Advisors II LP -- Long-term IDRs 'BBB-'. Och-Ziff Finance Co. LLC -- Long-term IDR 'BBB-' -- $400 million senior unsecured debt 'BBB-'. Contact: Primary Analyst Nathan Flanders Managing Director +1 212-908-0827 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Meghan Neenan, CFA Senior Director +1 212-908-9121 Committee Chairperson Sean Pattap Senior Director +1 212-908-0642 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below