KBRA Publishes and Affirms Ratings for North Haven Private Income Fund LLC
11 Jul 2024 | New York
KBRA publishes and affirms the issuer and senior unsecured debt ratings of BBB for North Haven Private Income Fund ("North Haven" or "the company"). The Outlook for the ratings is Stable. On December 13, 2022, KBRA assigned issuer and senior unsecured debt ratings of BBB with a Stable Outlook to North Haven Private Income Fund LLC on an unpublished basis. On December 12, 2023, KBRA affirmed issuer and senior unsecured debt ratings of BBB with a Stable Outlook for North Haven Private Income Fund LLC on an unpublished basis.
Key Credit Considerations
The ratings reflect North Haven's strong ties to the ~$1.5 trillion in assets under management and/or supervision from Morgan Stanley Investment Management and the access to capital through the Morgan Stanley Wealth Management Division. As part of the Morgan Stanley ecosystem, the company leverages the broad private credit platform, which includes about $15.6 billion of committed capital in direct lending and SEC exemptive relief to co-invest with affiliated business development companies and other affiliated investment vehicles. Further strengthening the company's scale is the approved merger with its affiliate business development company ("BDC") SL Investment Corp. ("SLIC") with North Haven as the surviving entity. The merger is expected to close in the third quarter of 2024.
Morgan Stanley Private Credit has a strong track record of direct lending and opportunistic private credit investments investing across the capital structure with an emphasis on senior secured loans. As of March 31, 2024, the company had a diversified $3.8 billion investment portfolio at fair value, which, on a pro-forma basis post-merger, will increase to about $5 billion, comprised 99% of senior secured first lien loans to 269 portfolio companies. The company focuses on the upper middle market with an average 12-month EBITDA of $189 million across 43 industries largely focused on less cyclical, defensive sectors. The top three sectors are Software (21%), Insurance Services (14%), and Health Care Providers & Services (8%) with little change expected due to the merger. Furthermore, the company currently has only one portfolio company on non-accrual at only 0.2% and 0.6% of total investments at FV and cost, respectively. While the portfolio remains unseasoned due to its short operating history, 98.4% of the portfolio maintains an internal rating of 2 or higher, indicating that it is performing at or above expectations at underwriting. The company maintains low leverage of 0.41x at March 31, 2024, but on a pro-forma basis, will increase to 0.84x, still appropriate in our view and well within the company's target leverage of 1.0x and 1.25x, which is in line with peers and within regulatory asset coverage minimum of 150%. The company's funding mix is solid with three bank credit facilities totalling $2.8 billion of committed lines and $885 million of senior unsecured debt.
As a perpetual continuously offered BDC, the company raises capital though monthly private offerings of its units and offers quarterly liquidity at NAV to unit holders through redemptions. Redemptions are limited to 5% per quarter and are at the discretion of the board of directors. Capital raises have been solid since inception with minimal repurchases. The company raised about $3.1 billion and repurchased approximately $199 million through June 1, 2024, from inception. The company maintains solid liquidity through available credit lines and targets more liquid BSLs at 10% to 15% of the total portfolio to meet potential redemptions. As of March 31, 2024, North Haven had $1.7 billion of available credit lines and about $199 million in cash with no near-term debt maturities and about $883 million of unfunded commitments. Liquidity is expected to remain solid following the merger.
Counterbalancing the credit strengths are the company's limited operating history offset by the long tenure of its management in private credit, relatively illiquid investments, retained earnings constrains as a regulated investment company ("RIC"), and an uncertain economic environment with high base rates, inflation, and geopolitical risk.
North Haven Private Income Fund LLC is a New York based, externally managed, non-diversified private, perpetual life, closed-end investment management company regulated as a business development company ("BDC") under the Investment Company Act of 1940 and for tax purposes, the company has elected to be treated as an RIC. The company commenced operations on February 1, 2022. North Haven's adviser is MS Capital Partners Adviser Inc., a wholly owned subsidiary of Morgan Stanley ("MS"), a leading global investment bank. Morgan Stanley has no obligation, contractual or otherwise, to financially support North Haven. North Haven's obligations are not MS obligations or guaranteed by MS and MS has no history of financially supporting any MS BDC even during periods of financial distress.
Rating Sensitivities
A rating upgrade is not expected in the medium term. A rating downgrade and/or Outlook change to Negative could be considered if management alters its stated company strategy by increasing focus on riskier investments coupled with higher leverage metrics. A prolonged downturn in the U.S. economy with negative impact on North Haven's earnings performance, asset quality, and leverage or a significant change in senior management and/or risk management policies could also lead to negative rating action.
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