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Rating Action:

Moody's Assigns Corporate Family Rating of (P)B2 to Victory Capital Holdings, Inc.; Outlook Stable

16 Sep 2014

New York, September 16, 2014 -- Moody's Investors Service has assigned a (P)B2 corporate family rating to Victory Capital Holdings, Inc. (Victory), a rating of (P)B2 to its $25 million senior secured revolving credit facility, and a rating of (P)B2 to its $310 million senior secured term loan. The planned use of proceeds is primarily to retire existing debt outstanding and to fund the purchase of Munder Capital Management (Munder).

RATINGS RATIONALE

Victory is a Delaware Corporation formed in February 2013 for the sole purpose of acquiring Victory Capital Management Inc., and Victory Capital Advisers, Inc. from Key Bank N.A. Victory is primarily a traditional equity manager that has developed a niche, multi-boutique management model. It manages assets for institutional, intermediary and retirement clients through separately managed accounts, collective trust funds and open-end mutual funds.

Munder is similar in size, scope and business profile to Victory. Like Victory, Munder was also a bank-affiliated asset manager, previously being part of Comerica N.A. The firm historically focused on mid-cap investing, although it has broadened its product offerings to value, growth, international equities and fixed income investing through both institutional accounts and retail mutual funds.

In April of this year, Victory announced an all-cash purchase of Munder for approximately $415 million which included Munder's subsidiary Integrity Asset Management. Outstanding net debt at Munder of approximately $54 million will be retired. Crestview Partners, the majority owner of both the acquirer and target, is planning to finalize the sale of Munder to Victory in the third quarter of 2014. Additional equity financing for the new company will be led by funds managed by Crestview Partners ($71 million), Reverance Capital Partners ($41 million) and Ohio Teachers ($30 million). Both Munder and Victory are portfolio holdings within Crestview Partner's private equity funds, and the transaction is a related-party transaction between Crestview Partners Fund I and Crestview Partners Fund II. The transaction was approved by the shareholder committees of both private equity funds.

In the context of Moody's asset manager universe, Victory is a small, niche player with respect to market scale and diversification. Although they have delivered good performance in mid-cap and small-cap investing, both Victory and Munder have had difficulties in translating that performance into positive net client flows. Both firms have been, and remain, in a net client outflow situation. Furthermore, the combined firm's product concentration remains in active domestic equity management (80% on a pro-forma basis), a highly competitive area, which we believe continues to face secular headwinds, as investors continue to direct flows into lower-cost, passive investment products.

While there is substantial product overlap between the two firms, the combination may offer some benefits, particularly with respect to sales distribution and potential cost synergies. Victory management has argued that a key commercial logic for the merger is for Victory's stronger distribution team to utilize Munder's attractive performance record to attract assets. Given the weak, long-term asset resiliency across product lines within Victory's businesses, we believe it would be prudent to see new empirical evidence that this commercial logic will be effective, before adjusting our view of the firm's asset raising and retention abilities.

After giving effect to the transaction, leverage of 5.0 x (as calculated by Moody's based on the combined entities' 2013 financials) is high, limiting the firm's financial flexibility and profitability. The firm's financial flexibility is likely to be further limited by muted growth of assets under management and any use of excess cash to fund equity distributions. Furthermore, the company's concentration in active US management, coupled with its relatively small scale, compared to the broader asset manager universe, are additional key drivers of its (P)B2 rating.

The ratings could move up if the franchise grows due to marked increases in net client flows, business adaption to a lower cost structure environment which materially increases net income margins, or a significant reduction in leverage (e.g. Debt/EBITDA below 2.5x). The ratings could move down if there are sustained gross client redemptions combined with net client outflows, further departure of key staff, weakening of its brand reputation, or leverage moves above 5.5x.

The stable outlook reflects the firm's stable cashflow generation and the potential for cost savings arising from the merger, offset by its net client outflow trajectory.

The following ratings were assigned:

Victory Capital Holdings, Inc.:

Corporate Family Rating -- (P)B2

$25 million RCF - (P) B2

$310 million Term Loan -- (P) B2

The principal methodology used in this rating was Asset Managers: Traditional and Alternative published in February 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Stephen Tu
Vice President - Senior Analyst
Managed Investments Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yaron Ernst
MD - Managed Investments
Managed Investments Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns Corporate Family Rating of (P)B2 to Victory Capital Holdings, Inc.; Outlook Stable
No Related Data.
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