KBRA Affirms the Rating Assigned to BNP Paribas' Participation in a Subscription Facility to Various Partnerships Managed by Advent International
26 Sep 2024 | London
KBRA UK (KBRA) affirms the A rating and Stable outlook assigned to BNP Paribas' participation in a subscription facility in the form of a multi-currency revolving credit agreement (the "Facility") to five funds (the "Funds") managed by Advent International (the "Manager"). The Facility is provided by a syndicate of lenders including BNP Paribas (the "Lenders"). The rating assigned was requested by BNP Paribas as a participating lender in the transaction. Neither Advent International 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
Asset Coverage: Availability under the Facility is determined by the applicable advance rate applied to the uncalled capital commitments of Limited Partners (LP) based on their classification. The Available Commitment is defined as the lesser of: (i) the Sub-Facility limit of the Fund; and (ii) the Borrowing Base for each Fund. The Facility has advance rates 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 debit reliance per individual investor or investor type. The combination of these features results in significant asset coverage on the uncalled capital, ranging from 160% to 177%, in line with last surveillance.
No Cross Collateralisation Among Fund Groups: In line with prior surveillance, the Funds that have acceded to the agreement are Advent International GPE IX ("GPE IX"), Advent International GPE X ("GPE X"), Advent Global Technology ("AGT"), Advent Global Technology II ("AGT II"), and Advent Latin America PE Fund VII ("LAPEF VII"). The obligations of the partnerships within a Fund are joint and severally liable, and secured by all investor commitments of that Fund. There is no cross collateralisation or cross default across the Funds. To control borrowing per Fund, there are sub-limits under the Facility agreement that restrict the amount of indebtedness per Fund. In addition, the advance rate per Fund is calculated from the LP base of that Fund only, with varying advance rates depending on the investor type and concentration of the LP, resulting in lower advance rates for the weaker and/or more concentrated the investor base.
Alignment of Interests: A failure to fulfill a capital call can result in the loss of rights to distributions from the Funds 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 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 the defaulting LP’s drawable commitments due and payable; (ii) suspension of distributions to the 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.
Quality of LP Commitments: The committed capital amounts are pledged by LPs with varying credit characteristics. The financial strength of the LPs is important in rating this transaction because security is in the form of their commitments; if they are unable to meet those commitments, the integrity of the transaction could be compromised. KBRA’s assessment of LP credit quality considered a combination of third-party public ratings and an independent, internal review of the investors comprising the borrowing bases. For the five Funds, the quality of the LP bases remains broadly in line with the analysis at last surveillance.
LP Diversification: The diversification of LP commitments is determined utilising an adjusted Herfindahl-Hirschman Index (the “HHI”) and has remained in line with the LP diversification at last surveillance. The investor base of the latest flagship fund GPE X is highly diverse, with the largest investor commitment of approximately 5.2% and an adjusted HHI of 99.5. The most concentrated LP base is LAPEF VII, which includes approximately 45 investors with a HHI score of 13.5. The concentration score for LAPEF VII is lower than the average facility reviewed by KBRA, although it is noted that a high proportion of investors are estimated to be rated of investment grade quality.
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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