KBRA Assigns a Rating to Senior Unsecured Notes Issued by Citadel Finance LLC
19 Mar 2025 | New York
KBRA assigns a BBB rating to $1,000,000,000, 5.90%, Senior Unsecured Notes issued by Citadel Finance LLC. The Outlook is Stable. The Senior Unsecured Notes are guaranteed, severally and not jointly, by Citadel Wellington LLC, KGSF Offshore Holdings Ltd., and Kensington Global Strategies Fund II Ltd. (the "Rated Funds"), in proportion to the proceeds distributed to each Fund (determined by each Funds’ ownership interest in the issuing vehicle Citadel Finance LLC). KGSF Offshore Holdings is an intermediate holding company and a substantially owned subsidiary of Kensington Global Strategies Fund Ltd.
Key Credit Considerations
Long–Term Performance Track Record: Citadel Wellington LLC, the first multi-strategy fund launched by Citadel, has a 30+ year track record. As of January 2025, Citadel Wellington LLC generated returns of 15.21% in 2024 in line with 15.28% in 2023. Since its inception in 1990, Citadel Wellington has generated a 19.46% annualized return. This long-term performance track record has enabled Citadel to attract and retain capital, and drive favorable terms across a broad array of financing counterparties, as well as drive commercial terms that provide for active investment in talent, technology and other infrastructure to build and maintain an institutional alternative investment firm. Citadel is recognized by the London Clearing House as the most profitable hedge fund manager of all time since 2022.
Institutional Control Framework: In KBRA’s view, the emphasis, scale and sophistication of Citadel’s middle and back-office functions, to include risk management, treasury, and operations, are a credit positive and provide for strong controls that are independent from the trading side of the organization.
Use of Leverage: The use of leverage in investment strategies, measured as either net exposure or gross exposure to net asset value (NAV), contributes risk to creditors. In addition to balance sheet leverage, when considering the prevalence of derivative assets in the Rated Funds, off-balance-sheet exposure contributes additional leverage, and can be measured using supplemental metrics such as risk sensitivities (i.e., the dollar value of one basis point change (dv01) for rate risk) or volatility. Nevertheless, while the portfolios are leveraged, in maintaining a focus on market neutrality, market risks are believed to be well controlled based on daily fund volatility relative to capital and results of stress testing for extreme scenarios such as the 2008 financial crisis.
Redemption Risk: Approximately 70% of the investor base has the contractual right to redeem and extract a 1/16th of capital on a quarterly basis without penalty. There are various mitigants including a 60-day notice period and a low threshold above which there are significant withdrawal charges that incent investors to redeem over longer periods of time, allocable to remaining shareholders. The remaining 30% of capital is subject to a rolling two-year lockup which creates stability. Additionally, there is a strong alignment of interests with Citadel principals and employees represent 18% of the capital base for the Rated Funds. Strong liquidity management helps to mitigate redemption risks, among other factors, with generally more than of 40% of NAV held in cash and cash equivalents. Additionally, a significant portion of investors have been invested for more than ten years with the 15 largest investors investing an average of 15 years. Notwithstanding the potential for “NAV gates” and the aforementioned liquidity terms for investors, any creditor/counterparty with a medium-to-long term tenor exposure considers the possibility of redemptions and the implications for the liquidity of the Rated Funds.
Liquidity Management: Liquidity, illustrated by a pre-funded pool of liquidity reserves, which averages in excess of 40% of invested capital in 2024, is supported by highly diversified sources of funding by type, lender/funding provider, and term. Excess liquidity is tested daily via a proprietary modeled cash outflow analysis, ensuring ample access to funding in a variety of stress scenarios. As a source of interest and principal payment, this pool of liquidity as well as the generally liquid nature of the Rated Funds’ assets, with vast majority of assets being Level 1 and Level 2, provide substantial excess debt service capacity on the Notes.
Risk Diversification: The Rated Funds manage liquid portfolios that are generally managed within a market neutral framework and that are highly diversified by single asset, sector, geography, and risk type. This diversification within and across five primary investment strategies (equities, commodities, fixed income and macro, quantitative strategies, and credit) should help to provide stability over both the short- and long-term as risk can be better managed across evolving markets.
Unconstrained Risk Profile: There are few formal external and regulatory constraints on the investment portfolio, leverage, risk concentrations, exposure to illiquid assets or other sources of risk. Further, exposures and leverage have the potential to change rapidly in responses to market conditions, making it challenging to predict risk over more than the medium-term; rather, creditors and counterparties must rely on the control structure, including internal risk management and track record of senior management. As of Q4 2024, approximately 2% of the portfolio was categorized by Citadel as “Level 3” investments which are regarded as illiquid investments.
Dependence on Trading Counterparties: As with other wholesale-funded trading businesses, Citadel is dependent on the continued confidence of counterparties and funding providers. Even with term maturities in its funding arrangements, there is an existential reliance on wholesale funding access, which, if lost, could result in a rapid, potentially disorderly, unwinding of the portfolio. This risk is partially mitigated by Citadel’s liquidity, asset-liability matching practices, industry leading PB terms, 40+ funding counterparties and its self-clear capabilities.
Notes Guaranteed by Rated Funds: The Senior Unsecured Notes are guaranteed, severally and not jointly, by Citadel Wellington LLC, KGSF Offshore Holdings Ltd., and Kensington Global Strategies Fund II Ltd., in proportion to the proceeds distributed to each Fund (determined by each Funds’ ownership interest in the issuing vehicle Citadel Finance LLC). KGSF Offshore Holdings is an intermediate holding company and a substantially owned subsidiary of Kensington Global Strategies Fund Ltd. The several guarantee is weaker than a joint and several guarantee, and as such, the ratings of the Notes look to the lowest rated guarantor. Nevertheless, the current issuer ratings are equivalent across the entities.
Limited Impact to Financial Profile: With the additional $1,000 million issuance, increasing total issuance of the Senior Unsecured Notes to $1,600 million, issuance represents 3.0% of the total capital of the Rated Funds.
Rating Sensitivities
Negative Rating Sensitivities
- Sustained trend of poor performance may result in increased investor redemptions or financing counterparty confidence, presenting challenges to the business model.
- Material increases in risk, measured by volatility, stress testing, or asset and strategy–specific risk metrics may accompany short-term losses in capital, put pressure on liquidity and erode the confidence of market counterparties and lenders.
- Unexpected departure of key management personnel may result in degraded performance, changes in risk management practices and/or increased investor redemptions.
Positive Rating Sensitivities
- Sustained positive performance with stable volatility may drive further growth in capital.
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