KBRA Affirms the Rating Assigned to BNP Paribas' Participation in a Capital Call Facility to Five Arrows Principal Investments IV
27 Jan 2025 | London
KBRA UK (KBRA) affirms the A rating assigned to BNP Paribas' participation in a committed and secured capital call facility (the “Facility”) to Five Arrows Principal Investments IV ("FAPI IV" or the "Fund"). The Outlook is Stable. The Facility is provided by a consortium of lenders including BNPP. The rating assigned was requested by BNPP as a participating lender in the transaction. Neither Five Arrows nor any of its associates has requested this report or the rating, and the surveillance report has not been prepared for or approved by any of them. BNPP has committed €125 million to the €625 million Facility.
Key Credit Considerations
Financial Covenants and Structural Features: The primary collateral and source of repayment for the Facility is the Undrawn Capital Commitments (“UCC”) of the Fund. The undrawn commitments of Qualifying Investors must cover the Fund’s Total Financial Indebtedness by 1.50x, or 1.35x once 50% of the capital commitments have been called. Additionally, since issuance of the rating, Five Arrows Principal Investments IV B FPCI has acceded to the agreement. Any borrowings made by Five Arrows Principal Investments IV B FPCI must cover it's Total Financial Indebtedness by 2.80x, or 2.50x once 50% of total investor commitments have been called. A failure to remedy a breach of the financial covenant will result in a Mandatory Prepayment Event whereby a borrower will have to repay the required amount to ensure compliance with the above financial covenant under the terms of the Facility Agreement. As of January 2025, the Fund is in compliance with the financial covenants.
Investor Diversification: Diversification of investors commitments is determined utilising an adjusted Herfindahl-Hirschman Index (the “HHI”). As of January 2025, the Fund’s investor base includes 250 investors, up from the 217 investors reviewed at issuance. 36 new investors derive from Five Arrows Principal Investments IV B FPCI which has acceded the Facility as an additional borrower since issuance and therefore, at issuance, KBRA did not assess these 36 investors. Overall, the 1/HHI, has increased marginally from 48.92 at issuance to 49.27 calculated using the total investor commitments, implying a slight increase in diversity within the investor base. Of the total number of investors, 82 are classified as QLPs, in comparison to 80 QLPs at issuance. As a result, the adjusted 1/HHI for QLPs has increased from 23.77 at issuance to 24.85, implying a slight increase in diversity within the QLP base.
Quality of Investor Commitments: KBRA’s assessment of LP credit quality considered a combination of third-party public ratings and an independent, internal review of the investors within the Fund. As of January 2025, approximately 59% of total investor commitments were estimated to be equivalent to investment grade credit quality, in comparison to 56% as at issuance. Approximately, 76% of QLPs were considered to be equivalent to investment grade as of January 2025, in comparison to 74% at issuance.
Incomplete Cross Collateralisation across the Parallel Funds: The French-domiciled Funds do not provide a guarantee for any borrowings under this Facility. Additionally, for any borrowings made at a subsidiary level, the French Funds only guarantee the obligations up to their respective percentages of the pro-rata commitments. As such, KBRA considered the investor base of each partnership within the Fund on a standalone basis in arriving at its final rating.
Alignment of Interests: A failure to fulfil a capital call can result in the loss of rights to distributions from the Fund as well as the potential to be restricted from investing in future private capital opportunities. Furthermore, in the event an LP defaults in respect of 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) declaration of defaulting LP’s drawable commitments due and payable; (ii) suspension of distributions to 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.
Sponsor History and Track Record: Founded over 200 years ago, Rothschild & Co Group is a global and family-controlled financial services company providing M&A, strategy and financing advice, as well as investment and wealth management solutions to large institutions, families, individuals and governments, worldwide. Five Arrows is the alternative assets arm of the Rothschild & Co Group. As of December 2024, Five Arrows had an AUM of approximately €28 billion.
Rating Sensitivities
Decline in LP Credit Quality: A decline in the credit quality of the Fund’s investors as a result of: (i) deterioration in the credit quality of underlying investor(s); (ii) transfer of interest(s) to investors of lower credit quality characteristics; (iii) inclusion of investor(s) with weak credit quality characteristics; and (iv) weaker than expected investor diversification, may result in negative rating changes.
Increase in LP Credit Quality: An overall higher credit quality of the Fund’s investors as a result of: (i) improvement in the credit quality of underlying investor(s); (ii) transfer of interest(s) to investor(s) with better credit characteristics; (iii) inclusion of investor(s) with strong credit quality characteristics; and (iv) stronger than expected investor diversification, may result in positive rating changes.
Underperformance of Fund Manager: A decrease in the Fund NAV due to underperformance of the Funds’ underlying assets. Deterioration of the Funds’ assets may, for example, elicit hesitation of the Funds’ LPs to fund their respective capital calls regardless of the underlying LP security and protections to the Lenders.
A full report will soon be available on www.kbra.com.
To access ratings and relevant documents, click here.