KBRA Affirms the Rating Assigned to BNP Paribas' Participation in a Secured Revolving Credit Facility to Lone Star Fund XII, L.P.
30 Sep 2024 | 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 XII, L.P. (the "Fund"). The Outlook is Stable. The Facility is provided by a consortium of lenders (the “Lenders”) including BNPP. The rating assigned was requested by BNP Paribas as a participating lender in the transaction. BNP Paribas have committed $250 million commitment to the $2.8 billion Tranche A Facility. As of August 2024, the Facility was extended to August 2025.
Key Credit Considerations
Asset Coverage: 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 reached its final close in June 2024, raising approximately $5.3 billion. As of August 2024, the Fund has called approximately $630 million from the LPs, or approximately 11.9% of total commitments. 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. Considering the advance rates and concentration adjustments based on investor type, the minimum asset coverage is 152% based on a maximum effective advance rate of 65.9% on Tranche A.
Alignment of Interests: A failure to fulfil a capital call can result in the loss of rights to distributions from the Fund. 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) a reduction in the defaulting LP's outstanding capital contributions/capital account with distributions of such reduction amount paid to other non-defaulting LPs; (ii) redemption of the defaulting LP's interest at a reduced rate; (iii) reduction or termination of the defaulting LP’s unfunded commitment to the Fund; and (iv) any other remedy available under law. All of these provisions are strong incentives for LPs to meet capital calls.
Quality of Limited Partner Commitments: KBRA’s assessment of the Limited Partner credit quality considered a combination of KBRA ratings, third-party public ratings and an independent, internal review of the unrated investors comprising the Fund as of June 2024. Of the total LP base, approximately 81% have ratings (either directly or indirectly through an affiliated or parent entity). 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 85% of the Fund's LP base is estimated to be equivalent to investment grade credit quality.
Limited Partner Diversification: Diversification of LP commitments is determined utilising an adjusted Herfindahl-Hirschman Index (HHI). As of June 2024, the Fund’s total capital commitments increased from $4.5 billion at issuance of the rating to $5.3 billion, received from approximately 87 LPs. Following the increase in the LP commitments, the adjusted HHI has improved from 13.6 to 16.8. While the diversification has improved since issuance, this still represents a moderately concentrated LP base, which is largely offset by the credit quality of the LPs, which are predominantly investment grade rated institutional investors.
Manager 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
Overall Increase in Credit Quality of LP Base: Overall higher credit quality of the LPs of the Fund as a result of either, or both, of the following occurrences: (i) improvements in credit quality of underlying LPs; (ii) transfer of interest(s) to LP(s) with better credit quality, could result in a positive rating change.
Overall Decline in Credit Quality of LP Base: Overall lower credit quality of LPs within the Fund as a result of either, or both, of the following occurrences: (i) deterioration in credit quality of underlying LPs; (ii) transfer of interest(s) to LP(s) of lower credit quality, could result in a negative rating change.
Underperformance of Fund Manager: Underperformance of the Fund’s underlying assets or investments may jeopardise debt repayment as the deterioration of the Fund by the Manager may, for example, cause hesitation of the Fund’s LPs to fund their respective capital calls, regardless of the underlying LP security and protections to the Lenders.
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