24 July 2023

Fitch Affirms Alcentra's 'Excellent' Investment Management Quality Rating

Fitch Ratings has affirmed Alcentra Ltd's 'Excellent' Investment Management Quality Rating (IMQR) with Stable Outlook.

The affirmation reflects consistency in Alcentra's investment processes, strong risk management framework with independent oversight and controls, enlarged credit asset management franchise, and enhanced investment resources gained through its integration with Benefit Street Partners.

The rating scope is limited to the European operations of Alcentra.

Key Rating Drivers

The rating of Alcentra takes into account the clarity and consistency of its investment and research processes, the experience, tenure and calibre of key personnel, the suitability of the front/back office systems and third-party arrangements, as well as the independent and thorough risk-and-control framework.

The rating also considers the greater scale and additional resources, particularly in the areas of technology, portfolio analytics and research coverage, resulting from Franklin Templeton's (FT) acquisition of Alcentra.

Alcentra's 'Excellent' rating is based on the following category scores:

• Investment Process: 'Excellent'
• Investment Resources: 'Excellent'
• Risk Management: 'Excellent'
• Company and Client Servicing: 'Excellent'
• Investment Performance: 'Consistent'

The above category scores result from an asset-weighted average of the scores obtained in the loans, direct lending and structured credit products that represented about 90% of Alcentra's total assets under management (AUM) as of 31 March 2023.

Investment Process: 'Excellent'

Alcentra's investment process is clearly defined with consistent sources of risk and return relative to investment objectives over time. The manager has access to multiple sourcing channels within the market as one of the largest credit managers in Europe. The research process is well-defined, disciplined, and incorporated into portfolio construction.

Investment Resources: 'Excellent'

Alcentra operates an optimal structure, which is organised along lines of strategy and geography, while leveraging a global research function. The investment and operations teams are well-resourced. A large number of analysts allow for a favourable issuer coverage ratio, and the portfolio managers have a high level of experience.

Alcentra continues to invest in its platform resources, for example through bolstering the technology team, and establishing a portfolio analytics function to enhance performance and reporting, business and data-engineering analysis.

Back-office functions have largely been outsourced to BNY Mellon Asset Servicing to improve efficiency.

Risk Management: 'Excellent'

Alcentra has a robust risk-and-control framework, in Fitch's view. Risk management is organised into compliance, operational risk, investment risk and anti-money laundering functions, with reporting lines to the Board of Alcentra and Benefit Street Partners.

Fitch believes Alcentra's risk framework provides independent oversight and controls, with comprehensive policies and procedures in place to ensure compliance with regulatory rules.

Company & Client Servicing: 'Excellent'

Alcentra has a strong franchise as one of the largest and longest-established European sub-investment-grade credit asset managers. The integration with Benefit Street Partners following Alcentra's acquisition by Franklin Templeton has led to improved scale and synergies, for example via a complementary credit research function.

Client servicing and reporting is sophisticated, reflecting Alcentra's institutional investor base.

Investment Performance: 'Consistent'

Alcentra's investment vehicles have consistently delivered on their stated investment objectives and investor expectations.

Investment Manager

Alcentra is a diversified sub-investment-grade credit manager with expertise in structured credit, senior loans, direct lending, high-yield bonds, special situations and multi-strategy. Alcentra had assets under management of USD35 billion at 31 March 2023.

Alcentra's ultimate owner FT had over USD1.4 trillion AUM, including USD257 billion in alternative investments, as at end-December 2022.

Rating Sensitivities

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

The rating is at the highest level on Fitch's scale and therefore cannot be upgraded.

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

The rating may be sensitive to material adverse changes to any of the aforementioned rating drivers, notably through weakened financial conditions, increased staff turnover or deterioration of processes and policies. A material deviation from Fitch's guidelines for any key rating drivers could cause the rating to be downgraded.

Copyright © 2023 Fitch Ratings, Inc., Fitch Solutions, Inc. and their subsidiaries.

Original article: https://www.fitchratings.com/research/fund-asset-managers/fitch-affirms-alcentra-excellent-investment-management-quality-rating-24-07-2023