KBRA Affirms the Rating to BNP Paribas' Participation in a Secured Revolving Credit Tranche A Facility to Lone Star Fund XI, L.P.
4 Feb 2025 | London
KBRA UK (KBRA) affirms the A rating assigned to BNP Paribas' ("BNPP") participation in a secured Revolving Credit Tranche A Facility (the "Facility") to Lone Star Fund XI, L.P. ("Fund XI" or the "Fund"). The Outlook is Stable. The Facility is provided by a consortium of lenders including BNPP. The rating was requested by BNPP as a participating lender in the transaction. BNPP have committed $44.0 million to the $397.0 million Tranche A Facility.
Key Credit Considerations
Features of the Facility: The availability under the Tranche A Facility is determined by the applicable advance rate applied to the Uncalled Capital Commitments of Limited Partners (“LPs”) based on their classification. The Available Commitment under Tranche A is defined as the lesser of (i) the Tranche A Maximum Commitment and (ii) the Tranche A Borrowing Base, minus in each case a Foreign Exchange Reserve Amount (equivalent to 5%) where a letter of credit is not drawn in USD. The Fund has raised approximately $8.1 billion commitments, and as of September 2024 approximately $674.8 million of total commitments remains uncalled.
The Facility has advance rates determined by investor type, with “Included” investors at a 90% advance rate, “Designated” at a 65% advance rate, and “Excluded” at a 0% advance rate. There are also Concentration Limits which limit the maximum debt reliance per individual investor or investor type. The combination of these features results in significant asset coverage on uncalled capital, equivalent to 170.4% based on a maximum effective advance rate of 58.7%. At issuance, the Tranche A effective advance rate was 60.8%. The advance rate has slightly reduced following reclassification of some LPs within the Borrowing Base. The Facility permits another facility to be secured by any LP commitments that are excluded from the Facility borrowing base (subject to approval by the Agent and the Lenders) which may result in an increase to the effective advance rate on the Tranche A Facility.
Alignment of Interests: A failure to fulfil a capital call can result in the loss of rights to distributions from the Fund as well as the potential to be restricted from investing in future private capital opportunities. Furthermore, in the event an LP defaults in respect to its obligation to meet capital contributions, the defaulting LP is subject to the application of various default provisions. Such provisions include but are not limited to (i) declaration of defaulting LP’s drawable commitments due and payable; (ii) suspension of distributions to defaulting LP; (iii) forfeiting the defaulting LP’s interest in the Fund; and (iv) selling all or any part of the defaulting LP’s interest. All of these provisions are strong incentives for LPs to meet capital calls.
LP Diversification: Diversification of LP commitments is determined utilising an adjusted Herfindahl-Hirschman Index (“HHI”). As of September 2024, the Fund’s investor base includes 142 investors with an adjusted HHI of 32.7. This is marginally lower than at issuance (34.3), however still represents a diversified investor base.
Quality of LP Commitments: The committed capital amounts are pledged by LPs with varying credit characteristics. Of the total LP base, approximately 70.2% had ratings (either directly or indirectly through an affiliated or parent entity) from select Credit Rating Agencies. KBRA evaluated the remaining LPs that are not rated with the information available on the underlying LP. Incorporating both the public ratings and KBRA evaluations, approximately 78% of the Lone Star XI LP base is estimated to be equivalent to investment grade credit quality. Note that all investors are included in the calculations, which includes a significant portion of “Excluded Investors” for which there is a zero advance rate in the Borrowing Base. Regardless of their type, all LPs are incentivised to meet their commitments given that they may be prevented from investing in future funds if they fail to meet a capital call and to be able to benefit from the unrealised value from the existing Fund investments. Overall, the LP credit quality has remained in line with that at issuance.
Sponsor History and Experience: Established in 1995, Lone Star is a private equity firm that has organized 25 funds with aggregate capital commitments totalling approximately $95 billion. Lone Star has a global footprint with 11 international offices across North America, Europe and Asia. Since inception, various Lone Star funds have closed or committed to close on 577 investments in 2,676 transactions at an aggregate purchase price of approximately $260 billion across North America, Europe, Asia and Latin America as of June 2024.
Rating Sensitivities
Decline in LP Credit Quality: A decline in the credit quality of the Fund’s investors as a result of: (i) deterioration in the credit quality of underlying investor(s); (ii) transfer of interest(s) to investors of lower credit quality characteristics; (iii) inclusion of investor(s) with weak credit quality characteristics; and (iv) weaker than expected investor diversification, may result in negative rating changes.
Increase in LP Credit Quality: An overall higher credit quality of the Fund’s investors as a result of: (i) improvement in the credit quality of underlying investor(s); (ii) transfer of interest(s) to investor(s) with better credit characteristics; (iii) inclusion of investor(s) with strong credit quality characteristics; and (iv) stronger than expected investor diversification, may result in positive rating changes.
Decrease in Asset Coverage: A decrease in asset coverage as a result of LPs being excluded from the Facility collateral, which may in turn reduce the overcollateralisation that is provided by those LPs, could result in a negative rating change.
Underperformance of Fund Assets or Investments: A decrease in the Fund’s NAV due to underperformance of the Fund’s underlying investments may jeopardise debt repayment as the deterioration of the Fund may, for example, elicit hesitation of the Fund’s LPs to fund their respective capital calls regardless of their contractual obligations to do so and the underlying LP security and protections to the Lender.
A full report will soon be available on www.kbra.com.
This press release has been updated since its initial publication date on February 4, 2025 to correct the number of fund investors.
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