Fitch Ratings has assigned a debt rating of 'A-' to the $500 million 6.375% senior unsecured notes issued by Ares Management Corporation (A-/Stable) due Nov. 10, 2028.

The transaction is expected to be leverage neutral, as proceeds are expected to be used to repay revolver borrowings.

Key Rating Drivers

The debt rating is equalized with Ares' Long-Term Issuer Default Rating (IDR), reflecting its fully unsecured funding profile and expectations for average recovery prospects of the notes under a stress scenario. The rating also reflects that the notes rank equally with existing and future senior unsecured notes issued by Ares and joint and several guarantees by its subsidiaries, which collectively receive all of the firm's revenues.

Ares' ratings reflect its solid competitive position as a global diversified alternative IM, sustained margin improvement, experienced management team, solid investment track record, strong and predictable fee-related earnings, given meaningful fee-earning assets under management (FAUM) and modest leverage.

Rating constraints for the industry include 'key person risk,' which is institutionalized throughout many limited partnership agreements; reputational risk, which can affect the firm's ability to raise future funds; and legal and regulatory risk, which could alter the alternative IM industry.

Rating constraints specific to Ares include lower fee-related EBITDA (FEBITDA) margins relative to higher-rated peers and lower historical incentive income, albeit emerging, and an above average payout ratio. Fitch also notes the more challenging macroeconomic conditions, including rising interest rates, inflationary pressures, elevated recession risk, geopolitical risk and an increased risk of a government shutdown, all of which may pressure investment performance and fundraising.

The Stable Outlook reflects Fitch's expectation that Ares will continue to generate stable management fees, maintain operating margins within Fitch's 'a' category earnings and profitability benchmark range, retain FAUM through the raising of new and expansion of existing funds, maintain leverage at-or-below 2.5x, and retain a solid liquidity profile in order to fund operations, meet co-investment commitments to the funds and service debt.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Factors that could, individually or collectively, lead to negative rating action/downgrade include a sustained deterioration in the FEBITDA margin below 30%, material declines in investment performance that adversely affect fundraising, a sustained increase in leverage above 2.5x, weakening interest coverage, or materially weakened balance sheet liquidity. Negative rating momentum could also be driven by a key-person event, and/or a legislative or regulatory event which negatively affects the company's ability to raise FAUM and generate fees.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Factors that could, individually or collectively, lead to positive rating action/upgrade include the maintenance of the FEBITDA margin above 40%, increased fee revenue diversity, an improved ability to generate incentive income, maintenance of leverage below 2.5x and interest coverage above 8.0x.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The unsecured debt rating is linked to the IDR and is expected to move in tandem. However, a meaningful decline in the amount of unsecured debt in the capital structure, in favor of secured borrowings, could result in the unsecured debt rating being notched down from the IDR.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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