Fitch Ratings has published an update to its “Private Equity Collateralised Fund Obligations (PE CFO) Rating Criteria”, which outlines the agency’s methodology for analysing credit risk in securitisations backed by alternative investment funds.
This report updates and replaces the prior criteria reported titled “Private Equity Collateralized Fund Obligations (PE CFO) Rating Criteria” dated 4 December, 2020. The changes will not have an impact on any PE CFO ratings.
In the new criteria, the specific loan-to-value (LTV) limit of 50% for investment grade ratings has been removed. Fitch will continue to assess the appropriate level of credit enhancement for each transaction based on cash flow modelling results, as well as structural features, the quality of the portfolio, and other factors as discussed in the report. Nevertheless, Fitch may limit the rating levels of PE CFO obligations that do not exhibit sufficient levels of subordination or credit enhancement based on the portfolio or structure, even where modelling results might indicate higher ratings.
The approach to rating portfolios exhibiting material concentration by general partner (GP) has been also modified. A model-implied rating will be determined using the higher of (i) applying the existing 25% limit to GP exposure and (ii) affording full credit to GP exposures above 25% with a PE CFO obligation rating cap at the GP’s rating.
A new approach to model cash flows for certain investment types such as co-investment vehicles and continuation funds has been introduced. Fitch will adjust the vintage of certain investment types using the investment’s term, age, and a 10-year commingled-fund life assumption, and overlay concentration limitations.
Consideration for third party funding of capital calls has also been added. For transactions that rely on a third party meeting the transaction’s capital commitments, the PE CFO’s obligations will be capped at the rating of the third party.
Clarification has been added that fully defeased obligations that do not have material exposure to the performance of underlying funds in a PE CFO are not subject to the broader PE CFO obligation rating cap of ‘A’ category.
