KBRA Affirms the Rating Assigned to BNP Paribas' Participation in a Capital Call Facility to the Partnerships Comprising PAI Partners VIII
29 Sep 2023 | London
KBRA UK (KBRA ) affirms the A rating and stable outlook 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 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 2023 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: Since issuance of the rating, the LP base of PAI Partners VIII-1 has increased from approximately 170 LPs to over 300 LPs as of August 2023. 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 issuance.
LP Diversification: The diversification of the LP commitments is determined utilising an adjusted Herfindahl-Hirschman Index (the “HHI”). Due to the increase in the number of LPs, the diversification for PAI Partners VIII-1 has increased from an adjusted HHI of 39.7 at issuance to 57.6, with the largest investor representing approximately 4.6% of commitments. As of August 2023, PAI Partners VIII-2 has 23 investors and an adjusted HHI of 21.5, compared to no LP commitments at issuance.
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 €26.4 billion of Assets under Management (“AUM”) having raised over €31.0 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 could weaken the underlying collateral base of the transaction and jeopardise the ability of the Fund to repay borrowings as a result of: (i) downgrades in credit quality of underlying LPs; or (ii) transfer of interest(s) to LP(s) of lower credit quality characteristics, which may result in a downward rating change.
Increase in LP Credit Quality: An overall higher credit quality of LPs of the Fund as a result of: (i) upgrades in credit quality of the underlying LPs; or (ii) transfer of interest(s) to LP(s) with better credit characteristics, may result in an upward rating change.
Underperformance of Fund Assets or Investments: A downward rating change may occur due to a decrease in the Fund’s NAV as a result of underperformance of the Fund’s underlying assets or investments. This may jeopardise debt repayment as the deterioration of the Fund's assets may, for example, elicit hesitation of the Fund’s LPs to fund their respective capital calls regardless of their contractual obligations and the underlying LP security and protections to the Lender.
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