KBRA Affirms the Rating for BNP Paribas' Participation in a Capital Call Facility Provided to the Partnerships Comprising PAI Europe VII
22 Feb 2024 | London
KBRA UK (KBRA) affirms the A rating and Stable outlook assigned to BNP Paribas’ participation in a capital call facility in the form of a committed and secured multi-currency facility (the “Facility”) to the partnerships comprising PAI Europe VII (the “Fund”). The rating assigned was requested by BNP Paribas. 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. BNPP have committed €100 million to the €500 million Facility.
Key Credit Considerations
Financial Covenants and Structural Features: The primary collateral and source of repayment for the Facility is the total uncalled committed capital of the Funds. The Facility includes Coverage Thresholds which requires that the undrawn commitments of the Fund must cover the Fund’s Total Financial Indebtedness by 1.40x (Coverage Threshold 1), or 1.25x (Coverage Threshold 2) if the sum of the Unfunded Subscriptions and Net Asset Value covers the Fund’s Total Financial Indebtedness by an amount greater than 2.50x. A failure to remedy a breach of these covenants within the acceptable cure period will result in an Event of Default under the terms of the Facility Agreement. The Lenders also have the right to issue capital calls on behalf of the Fund manager further to a continuing Event of Default. As of the most recent Compliance Certificate, provided for December 2023, the Borrower is in compliance with the 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 the (i) declaration of the defaulting LP’s drawable commitments due and payable; (ii) suspension of distributions to the defaulting LP; (iii) forfeiting of 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: Approximately 55% of PAI Europe VII-1’s commitments consists of investors that carry third-party public ratings (either directly or through a parent entity) from KBRA or other select credit rating agencies. KBRA evaluated the remaining 45% of unrated investors comprising PAI Europe VII-1. Across external and internal evaluations, approximately 86% of the PAI Europe VII-1’s LP base is of investment grade credit quality. Overall, the LP base remains in line with the analysis at prior surveillance.
LP Diversification: The diversification of the LPs’ commitments is determined utilising an adjusted Herfindahl Hirschman Index (the “HHI”). The investor base of PAI Europe VII-1 is highly diverse, with the largest investor commitment of approximately 3% and an adjusted HHI of 72.1. PAI Europe VII-2 has 29 investors with an adjusted HHI of 21.0, in line with prior surveillance.
Structural Limitations of the Facility: The Facility permits borrowings by PAI Europe VII-1 and PAI Europe VII-2 and these Fund Entities do not cross collateralise one another. There is no sub-limit under the Facility agreement that restricts the amount of indebtedness of each Entity’s individual investor base. 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 VII-2. In addition, each Fund Entity is restricted to borrow up to a maximum of 15% of total commitments as per the terms of its Limited Partnership Agreement.
Sponsor History and Experience: PAI Partners is a French private equity firm, originally part of Paribas Affaires Industrielles, which began operations in 1872. The Firm manages approximately €26 billion of assets under management, having raised more than €33 billion in capital from investors, including pension funds, insurance companies, governmental organisations, banks, fund of funds and high net worth individuals. PAI has raised third-party funds since 1998, investing €26 billion in buyouts of companies with a combined transaction value of over €70 billion.
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) deterioration in credit quality of underlying LPs; or (ii) transfer of interest(s) to LP(s) of lower credit quality characteristics, which 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; or (ii) the transfer of interest(s) to LP(s) with better credit characteristics, 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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