KBRA Affirms and Subsequently Withdraws the Rating of a Subscription Facility to BNP Paribas European SME Debt Fund 3 S.A. SICAV-RAIF
15 Dec 2025 | London
KBRA UK (KBRA) affirms and subsequently withdraws the A+ rating to a subscription facility to BNP Paribas European SME Debt Fund 3 ("SME 3", the “Fund” or the “Borrower”). The Facility is a €70.0 million revolving credit facility provided by BNP Paribas. The Facility's maturity is January 2026, subject to a further one-year extension option at the Lender’s discretion. The Fund is the third vintage fund in BNP Paribas Asset Management Europe's SME financing strategy and had its Final Close in July 2024. The Fund will follow the investment strategy of its predecessor funds, targeting European-based SMEs mostly co-financed by BNP Paribas Group with senior and first ranking debt. The rating action reflects the strong credit quality of the Limited Partner ("LP") base and stable Fund performance since rating issuance.
Key Credit Considerations
Financial Covenants and Structural Features: The primary collateral and source of repayment for the Facility is the Uncalled Capital Commitments (“UCC”) of the Fund from the underlying LPs. At all times, the Borrower is required to maintain a minimum coverage level of UCC from Eligible LPs relative to the amount of Total Financial Indebtedness of 135%. There is also an LTV Ratio, which requires the sum of the Eligible LP Commitments and the Net Asset Value (“NAV”) to cover the Fund’s Total Financial Indebtedness by an amount greater than 3.0x. A failure to remedy a breach of these covenants within the 15 Business Days will result in an Event of Default. The Lender also has the right to issue capital calls on behalf of the Fund Manager further to a continuing Event of Default.
Alignment of Interests: A failure to fulfil a capital call can result in the Defaulting 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) cancelling all or part of the Defaulting LP’s available commitment; (ii) selling or assigning the Defaulting LP’s interest; and (iii) suspending rights to distributions to the Defaulting LPs. These provisions are strong incentives for LPs to meet capital calls.
No Waiver of Set-off Rights: The Fund’s constitutional documents do not contain an agreement by the LPs to fund their capital contributions without set-off, counterclaim or defence. As such, the amounts that the Lender can call from an LP following an Event of Default under the Facility may be subject to set-off by that LP against any pending distributions to it or may be subject to any claims or defences that the applicable LP has against the Fund. This may result in the Lenders having to pursue the Borrower directly for repayment of the Facility, rather than being able to rely on their assigned rights to make capital calls ensuring that they will be repaid in full. As a partial mitigant, if there is an Event of Default under the Facility, the Borrower is restricted from making any distributions to the LPs. However, this does not fully mitigate against potential claims that an LP may have against the Borrower in a default scenario.
Credit Quality of LP Commitments: KBRA assessed the credit quality of the LPs comprising the Fund as of March 2025. KBRA’s assessment of the credit quality of the LPs was evaluated using (i) for rated entities (approximately 91.2% of commitments), the ratings assigned to the relevant LP or parent entity by KBRA or where a KBRA rating is not available, the public rating assigned by another rating agency and ii) for unrated entities, KBRA's evaluation of the relevant LP's credit quality. Overall, 91.2% of the Total Fund Commitments and 96.2% of Included LPs have been evaluated to be equivalent to investment grade credit quality. This has improved marginally compared to issuance noting the final close which took place in July 2024.
Diversification of LP Commitments: The diversification of the LPs’ commitments is determined utilising an adjusted Herfindahl-Hirschman Index (“adjusted HHI”). As of March 2025, the Fund had received commitments from 35 LPs which includes 29 Eligible LPs, with an adjusted HHI of 19.9 for the total LPs and 16.9 for Eligible LPs respectively, which represents a relatively concentrated LP base. This has improved marginally compared to issuance noting the final close which took place in July 2024.
Additional Claim to Distributions / Illiquid Assets: To the extent that some or all of the LPs default on their obligation to fulfil capital calls and repay the Facility, the Lender may have recourse to other assets of the Fund (as an unsecured creditor of the Fund). While this is credit positive and offers a secondary repayment source for this Facility, the assets of the Fund consist of debt investments which KBRA views as illiquid relative to UCC and there is no certainty with regards to the ability of the Fund to sell and realise sufficient value from these assets.
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 interests to LPs of lower credit quality characteristics; (iii) inclusion of LPs with weak credit quality characteristics; and (iv) weaker than expected LP diversification, may result in negative rating change.
Improvement 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 interests to LPs with better credit characteristics; (iii) inclusion of LPs 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 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 LPs’ security and protections to the Lender.
Quantitative Rating Determinants
Asset Quality: KBRA determined the asset quality based on the blended quality of the LPs’ credit quality and the equity risk of the distributions. This blended approach to derive the weighted average asset quality reflects the idiosyncratic nature of LP capital commitments and distributions to the Fund’s LPs, as well as the primarily investment grade LP base and the exposure to equity. Offsetting this asset quality determination is the asset base which would support the repayment of the Facility, as discussed in the asset coverage determinant.
Asset Coverage: Asset coverage is calculated assuming the maximum permitted Facility draw, in compliance with the covenants of the Facility Agreement. This determinant is represented by calculating the ratio of the most recently reported UCC of the LPs plus the Fund’s NAV to the current indebtedness under the Facility. Per the most recent information provided as of June 2025, the asset coverage is greater than 300% and remains in line with the ratings issuance.
Liquidity: As the Fund makes investments, the principal source of collateral value and debt service shifts from the remaining capital commitments (which is considered more liquid, with known contractual value and short time to fund) earlier in the Fund’s life to a greater reliance on the investment value of assets in the Fund itself (considered less liquid, with limited price transparency, greater complexity and uncertain realisation timing).
Duration: Duration has been determined based upon the remaining term of the Facility, maturing in January 2026, subject to extensions.
Cash Flow Analysis: The primary source of repayment for subscription facilities consists of LP pledges to pay commitment amounts; the Lender is paid only when the LPs remit their payments. In any case, should an LP fail to pay, the LPA places the burden of payment on the remaining LPs on a pro rata basis. Therefore, KBRA analyses repayment capacity in the context of the quantitative determinants described above.
Qualitative Factor
Manager Review: BNP Paribas Asset Management Europe is BNP Paribas’ asset management arm, with approximately €715 billion of assets under management as of September 2025. The Firm is ranked as the second largest asset manager in the European Union on a combined basis across BNP Paribas Asset Management Europe, AXA Investment Management, BNP Paribas Real Estate Investment Management and BNP Paribas Cardif. It employs over 3,300 employees in more than 30 countries and serves individual, corporate and institutional clients in 67 countries across Europe and Asia Pacific. The Firm has offerings across five capabilities: High Conviction Active Strategies, Emerging Markets, Private Assets, Systematic, Quantitative & Index, and Liquidity Solutions.
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