On Aug. 30, 2024, S&P Global Ratings published its criteria for rating subscription line facilities secured by an alternative investment fund's limited partner (LP) capital commitments (see "Methodology For Rating Subscription Lines Secured By Capital Commitments"). Below we answer questions about how we apply the criteria.

Frequently Asked Questions

What information does S&P Global Ratings need to assign a rating to a subscription line facility?

In addition to the fund's investor letters, term sheet, facility agreement, all LP agreements, and any other relevant documents, such as side letters, we typically expect to receive:

• Information about the general partner (GP) that manages the fund;
• Details on the LP pool, including the names of institutional investors and the amount they have committed to invest;
• Guidelines of the fund, including eligible assets and the target asset mix;
• Information about the fund's strategy, including targeted leverage;
• Data on the fund's historical performance or the performance of previous vintages of the fund; and
• The fund's financial reports.

The willingness and structure assessment considers the GP and the alignment of interest between LPs and GPs. As such, while direct interaction with the GP is not a requirement, it can greatly inform our view. Absent that interaction or other direct knowledge of the GP, our view of the GP is likely to be neutral, at best, to the assessment.

We do not need to talk directly with the GP, in contrast to our information requirement for assigning issuer credit ratings to funds. However, such a meeting may be helpful in some situations--for example, if the GP is less known or if the credit quality of the LPs is weaker than that of the fund itself.

In all cases, we expect access to sufficient information for our analysis.

How early in a fund's life can S&P Global Ratings rate a subscription line facility?

We can rate a subscription line of credit at the fund's inception, even when some of the LPs have not yet been confirmed and the fund has not yet invested in any assets. In such a scenario, examples of information we focus on include:

• Sufficient information about the GP and the performance of prior vintages of the fund;
• Information about the core LPs, as well as the size, diversity, and creditworthiness of the final LP pool; and
• The existing LP agreements, along with sufficient information to understand any allowed differences between the existing agreements and agreements with future LPs.

Where does S&P Global Ratings find information about a fund's LPs?

We rely on the fund or the lender to provide us with information on the LPs, including each LP investor's contribution to total capital. In addition, we expect the fund or lender to provide us with timely updates whenever changes occur. For example, we expect them to inform us if any LPs default, walk away from their capital commitments, or sell their interest to other LPs. We view this information as essential to our surveillance. Failure to receive relevant, timely information on LPs may lead us to withdraw ratings.

What does S&P Global Ratings expect to be the most common willingness and structure assessment?

We expect that many facilities, at their inception, may initially be assigned an adequate willingness and structure assessment unless they have particularly strong (or weak) legal features. This is because LP invested capital is typically low at inception and increases over time. Depending on our view of LP capacity (i.e., our quantified view of an LP's available resources), the anchor could range from 'aa' to 'b-' when the willingness and structure assessment is adequate.

As LP invested capital increases over time, our assessment of willingness and structure could improve, which may result in higher rating outcomes, if the increase is not offset by deterioration in other relevant areas, such as the fund's performance; the GP's reputation, track record, and size; or the experience and depth of the investment team.

Can S&P Global Ratings assign an issue rating to a subscription line facility if it does not have an issuer credit rating (ICR) on the fund?

Yes. We do not require an ICR on the fund to assign a rating based on the LP capital commitments. That said, if we have assigned an ICR to the fund by applying our alternative investment funds methodology, the ICR is a floor for the issue rating. We set the rating floor based on our view of whether the facility is secured by the fund's assets and whether it is a senior or subordinated obligation of the fund.

How much transparency does the CDO Evaluator offer when assessing LP capacity to meet capital calls?

Our CDO Evaluator is available for download on our Ratings360 website (https://ratings360.ratings.spglobal.com/r360/models). We do not publish nonpublic information provided to us that we may use as inputs in CDO Evaluator, but we may publish summary aggregate information about the LP pool, such as industry composition and the share of rating inputs determined based on sectoral views.

How does S&P Global Ratings consider recovery in the event LPs were to default on their capital commitments?

Within CDO Evaluator, we typically do not give benefit to potential recoveries after the default of an LP provider because recoveries from nonpaying LPs could take years and may occur long after the facility repayment date. In cases when after an LP has defaulted, we believe a facility's structure allows for default recovery prior to the facility repayment date, we may give credit to recovery within our capacity assessment. For example, we may give credit to recovery when the facility's legal final repayment date is sufficiently past the scheduled repayment date.

When timing is less clear, we may run collateralized debt obligation recoveries to determine the potential ratings impact of incorporating recovery on our analysis. Where relevant, such analysis could inform ratings committees' assessment of modifiers such as other vulnerabilities and strengths or holistic analysis.

What are the correlation assumptions used between LPs in CDO Evaluator?

For more detailed information on the assumptions used in our CDO Evaluator, please see Appendix C of our CDO criteria (see Related Criteria).

Is there a minimum number of LP investors required for S&P Global Ratings to apply its subscription line methodology?

We do not identify a minimum number of LPs required to apply the methodology (see "Highly concentrated facilities" in the criteria). However, when pools are highly concentrated (for example, with fewer than 10 LPs), we may assign a capacity assessment based on a weakest-link approach. As a result, the capacity assessment may be limited for highly concentrated pools, irrespective of the maximum draw amount available, and we would not utilize CDO Evaluator to determine capacity.

How does S&P Global Ratings view investment vehicles when evaluating the investor base? Could a rating input be determined with sufficient details about the underlying investor?

An entity may provide a capital commitment to a fund through an investment vehicle, such as a subsidiary or a wholly owned fund that is not rated. In these cases, we would not typically determine the rating input based on analysis of the investment vehicle. Instead, where we have a view on the ultimate holding entity (UHE) that is the final source of the investment, we may assign the rating input for the LP's capital commitment based on our view of the UHE and the relationship between the UHE and the investment vehicle.

For example, if an insurer invests in a fund through an investment vehicle such as a subsidiary or a wholly owned fund, which is the named LP, we may use a rating input for that vehicle equal to the rating on the insurer that is the UHE if, for example, it benefits from cross-default provisions, funding agreements, equity commitments, or other similar agreements (see table 4 of the criteria) or if we view the vehicle as core to the UHE's group (see "Group Rating Methodology") such that the UHE is likely to support it under any foreseeable circumstances.

We may use a rating input for a vehicle one notch below our rating on the UHE if it exhibits features consistent with a highly strategic group status. Or we may use a rating input for a vehicle three notches below the UHE rating if we believe they share sufficient reputational and economic links, such as when the UHE provides a comfort letter.

Which LPs are considered in the analysis of subscription lines?

We typically incorporate the relevant rating inputs for all LPs that we determine have committed capital to the fund, regardless of whether the subscription line facility views them as eligible for the purpose of determining the borrowing base or maximum draw amount of the facility. For uncommitted LPs, we do not incorporate LP capital into our analysis of LP capacity.

Is it necessary for each LP investor in a subscription line to be assigned a credit rating from S&P Global Ratings for S&P Global Ratings to assess LP capacity?

We do not have to rate all LPs to determine the capacity assessment. That said, when we use CDO Evaluator to conduct our analysis, we typically use a rating input for each LP, which is based on the information available to S&P Global Ratings. We use our rating or credit estimate for the LP when one is available (see "Appendix 3: Rating Inputs" in the criteria). If one is not available, we may use other sources of information to determine the rating input, including:

• Public, unqualified credit rating agency ratings that we assess as sufficiently comparable to our own ratings;
• Rating inputs based on linkages to other entities; or
• The appropriate sectoral credit estimate.

How does S&P Global Ratings evaluate the creditworthiness of LPs with limited counterparty and financial information, such as high-net-worth individuals, family offices, or pooled investment vehicles?

We typically assign rating inputs to high-net-worth individuals or family offices to incorporate their capital commitments in the capacity assessment (see "Appendix 3: Rating Inputs" in the criteria).

Consistent with our approach for determining the rating inputs for collateralized debt obligations, when the other sources of rating inputs are not available, we typically assume a rating input of 'CCC-', unless we have reason to assume another rating input. It reflects our lowest rating we apply to obligors we have not yet identified as defaulting or about to default.

How and why does S&P Global Ratings' approach limit exposure to sectoral credit estimates?

Sectoral credit estimates are based more on our general understanding of a sector's creditworthiness than on issuer-specific information. Because of this, we believe the information content in sectoral credit estimates is lower than that in other rating input sources, such as credit ratings.

We therefore allow for some adjustments to sectoral credit estimates, and we limit the exposure to individual LPs and the overall exposure to sectoral credit estimates. We may adjust the credit quality assumption for any combination of economic risk group and sector up or down by, at most, one rating category when we believe the average credit quality assumption for these LP investors is materially higher or lower than our standard assumption.

For example, for financial-sector LPs such as insurers that are operating in a jurisdiction where we assess economic risk in group 3, we may adjust the credit quality assumption by one category, to 'BB', if we believe the average credit quality for these LP investors is materially worse than our standard assumption.

We would also typically limit the exposure to committed capital from an LP for which our rating input comes from a sectoral credit estimate to 10% of the total uncalled capital commitment, as well as limit the exposure to individual LPs further when the overall exposure to sectoral credit estimates is higher. In such cases, we could choose to use another rating input source that incorporates more information about the individual investor, such as a credit estimate or a credit rating.

Finally, we may assume a lower capacity than the CDO Evaluator output indicates when sectoral credit estimates are used. For example, when 50% of the rating inputs (as measured by a dollar or other value amount) are based on sectoral views, we typically apply a one-notch downward adjustment.

However, these are examples, not hard-and-fast rules that would toggle on or off based on small changes to exposure to sectoral credit estimates.

What are the biggest risks for LPs not funding their commitments?

Our capacity assessment addresses the creditworthiness of LPs. We also consider the economic and reputational costs to LPs if they don't perform. This is incorporated through our willingness and structure assessment.

How do fund manager attributes affect the final rating? For example, what impact could a small fund manager have on the rating, all else equal?

Evaluating the GP that manages the fund is an important part of our willingness and structure assessment. In considering LPs' willingness to provide additional capital, we consider these elements of their interaction with the GP:

• The GP's alignment of interest with the LPs';
• The GP's reputation, track record, and size;
• The experience and depth of the investment team; and
• Whether the GP has experience in managing funds through stressful situations.

Even when a GP has an excellent reputation, LPs may view smaller fund managers as specialists in particular asset classes or strategies that could fall out of favor. Additionally, smaller fund managers may be more exposed to key-person risk--for example, if their investment team's experience is concentrated in a few individuals.

When could S&P Global Ratings apply the modifier for other vulnerabilities and strengths?

One example where we may apply this modifier is when a fund has unhedged foreign exchange risk, such as if the subscription facility is to be repaid in one currency but a significant portion of the LP capital commitments is pledged in a different currency.

How do sovereign ratings interact with subscription line ratings?

While we incorporate sovereign risk relevant to LPs into our capacity assessment, we incorporate sovereign risk relevant to the fund as step five in our framework.

Consistent with our alternative investment funds methodology, we believe subscription lines have moderate sensitivity to country risk. In other words, we may rate a subscription line up to four notches above the sovereign credit rating when a fund passes the relevant stress tests described in our criteria for ratings above the sovereign (see Related Criteria), based on where the fund is domiciled.

How frequently does S&P Global Ratings review the rating on a subscription line facility?

As with other sectors, we continuously surveil our ratings. When we receive new information, we consider that information in the context of our rating.

For example, if the composition of the LP pool changes as the manager completes a funding round, or if we learn new information relevant to our view of the LPs' willingness to meet capital calls, we consider whether that change affects our analysis. And if so, we would typically review the rating.

Related Criteria

• Alternative Investment Funds Methodology, Aug. 30, 2024
• Methodology For Rating Subscription Lines Secured By Capital Commitments, Aug. 30, 2024
• Methodology For Determining Ratings-Based Inputs, July 26, 2024
• Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
• Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013

Related Guidance

• Guidance: Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019