KBRA Affirms the Rating Assigned to BNP Paribas' Participation in a Capital Call Facility to the Partnerships Comprising PAI Partners VIII
4 Oct 2024 | London
KBRA UK (KBRA) affirms the A rating assigned to BNP Paribas’ (“BNPP”) participation in a capital call facility in the form of a committed and secured multi-currency facility (the “Facility”) to the partnerships comprising PAI Partners VIII (“PAI VIII” or the “Fund”). The Outlook is Stable. The Facility is provided by a consortium of Lenders including BNPP. The rating assigned was requested by BNP Paribas as a participating lender in the transaction. Neither PAI Partners nor any of its associates has requested this report or the rating, and this report has not been prepared for or approved by any of them.
Key Credit Considerations
Facility Covenants and Structural Features: The primary collateral and source of repayment for the Facility is the total uncalled committed capital of the Fund. The Facility includes Coverage Thresholds, specifically that the undrawn commitments of the Fund must cover the Fund’s Total Financial Indebtedness by 1.4x, which reduces to 1.30x or 1.25x if the sum of the Undrawn Commitments and Net Asset Value (“NAV”) covers the Fund’s Total Financial Indebtedness by an amount greater than 2.5x and the Fund is 50% or 70% drawn, respectively. As of the June 2024 Compliance Certificate, the Borrower is currently in compliance with the financial covenants.
Alignment of Interests: A failure to fulfill a capital call can result in the defaulting Limited Partner (“LP”) losing rights to distributions from the Fund and restrictions from investing in future private capital opportunities. Furthermore, in the event an LP defaults with respect to their 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.
Structural Limitations of the Facility: The Facility permits borrowings by PAI Partners VIII-1 and PAI Partners VIII-2, which do not cross-collateralise one another. As a mitigant, there is cross-default between the Borrowers which creates a strong alignment of interest for the General Partner to ensure no default by PAI Partners VIII-2, which is the less diversified and smaller vehicle compared to PAI Partners VIII-1. In addition, each Fund Entity cannot directly borrow more than 30% of total commitments under the Facility.
Quality of LP Commitments: The Fund reached its final close in November 2023, securing €7.1 billion in total commitments. As such, since previous surveillance the LP base of PAI Partners VIII-1 has increased from approximately 307 LPs to over 340 LPs as of August 2024. There has also been marginal reallocation of commitments between LPs and minor changes in KBRA's assessment of LP credit quality. Overall, the quality of the LP base remains broadly in line with the analysis at previous surveillance.
LP Diversification: The diversification of the LP commitments is determined utilising an adjusted Herfindahl-Hirschman Index (the “HHI”). As of August 2024, the total concentration score of the investors committing to all the Partnerships was 56.8 and to PAI Partners VIII-1 was 56.4, which represents a significantly diversified investor base. PAI Partners VIII-2 has 26 investors and an adjusted HHI of 22.6, representing moderately diversified investor base. All concentration scores are in line with the diversification of the Fund at last surveillance.
Sponsor History and Experience: PAI Partners is a French private equity firm based in Paris. It is one of the oldest firms in the sector, with its origins dating back to Paribas Affaires Industrielles, which started operations in 1872. The firm manages approximately €28 billion of Assets under Management (“AUM”) having raised over €33 billion in capital from investors comprising of pension funds, insurance companies, governmental organizations, banks, fund of funds and high net worth individuals.
Rating Sensitivities
Decline in LP Credit Quality: A decline in the credit quality of the Fund’s LPs as a result of: (i) deterioration in the credit quality of underlying LPs; (ii) transfer of interest(s) to LP(s) of lower credit quality characteristics; (iii) inclusion of LP(s) with weak credit quality characteristics; and (iv) weaker than expected LP diversification, may result in negative rating changes.
Increase in LP Credit Quality: An overall higher credit quality of the Fund’s LPs as a result of: (i) improvement in the credit quality of underlying LPs; (ii) transfer of interest(s) to LP(s) with better credit characteristics; (iii) inclusion of LP(s) with strong credit quality characteristics; and (iv) stronger than expected LP diversification, may result in positive rating changes.
Underperformance of Fund Assets or Investments: A decrease in the Fund’s NAV due to underperformance of the Fund’s underlying assets or 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.
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