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Case Study — 23 Jan, 2024
Highlights
The Client: Leading European private credit manager
Users: Fund Finance, Credit risk management, Portfolio Management.
Through the initial impact of COVID-19, sponsors looked into fund-level financing to seeking liquidity to capitalize on market dislocations disruptions. Net Asset Value (NAV) facilities, which are backed by the total equity value of fund’s portfolio, grew in demand and matured. NAV financings have been used not only to make follow-on investments and provide liquidity to portfolio companies, but also to accelerate distributions to investors or as a bridge to make investments that are sold to subsequent funds of the sponsor.
As the NAV market becomes more mainstream, a survey conducted by Proskauer[1] indicates 19 percent of closing Loan to Values (LTVs) were reported to be above 25 percent. Additionally, 65 percent of the closing LTVs for respondents’ NAV loan portfolios fall between 10 and 25 percent. This increasing leverage within the Alternative Investment Funds (AIF) universe poses potential credit risks to the lenders to the funds.
Members of the fund finance team of this institution are responsible for origination, measuring and managing credit risk of the funds and pricing for the underwritten loans. They were seeking a standardized, but tailored framework for evaluating specific risks NAV facilities pose. In addition, the credit manager’s key sponsor was interested in leveraging a comprehensive and transparent credit solution for assessing the creditworthiness of the NAV transactions.
Pain Points
Proskauer’s survey found that two of the most common closing LTVs in NAV lending strategies are between 10 and 25 percent. It is important to understand and to assess the key qualities of the borrower and underlying assets, which makes lenders comfortable taking on higher risk while pricing the greater risk into the loan. Additionally, as the NAV lending has matured, the NAV facility has also been prudently structured to provide liquidity and to help mangers to fulfil their fiduciary duty to its investor clients. As a result, this institution needed a comprehensive, standardized framework and stringent guidance for assessing the NAV facilities’ specific credit risk consistently across the board.
The credit risk analysis is challenging for several reasons.
In order to meet the growing demand for NAV facilities over the last few years, the institution’s credit risk and fund financing teams, who have extensive knowledge of the market and deals, have been working with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the standardized solution and to create customized solutions for NAV facilities, with the continued support of the Market Intelligence team.
Solution
In collaboration with the institution credit risk team, the Scorecard for NAV facilities combines Market Intelligence’s proprietary AIF Credit Assessment Scorecard and NAV market and lending experience to providean essential tool for identifying and assessing the various factors affecting the creditworthiness of NAV facilities and managing potential default risks with fund portfolios.
The AIF Scorecard solution includes:
Key Benefits
The fund financing and credit risk management teams felt that Market Intelligence offered a sound methodology and tailored model to evaluate the credit risk of AIFs, as well as NAV facility instrument-level credit risk. The teams subscribed to the offering and value having:
The AIF Scorecard for NAV facilities provides the institution with a comprehensive tailored solution to better assess and manage potential risks incurred when offering leverage to fund vehicles. Alignment with the S&P Ratings’ methodology with customisation specific towards NAV facilities offers benefits when it comes to loan syndication.
[1] Proskauer Releases 7th Annual Private Credit Survey, Proskauer. As of: April 25, 2023. https://www.proskauer.com/release/proskauer-releases-7th-annual-private-credit-survey
[2] S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.