Rating Action Commentary
ֳ Rates CVC Credit Partners European Direct Lending Fund III's SFFs 'A'; Outlook Stable
Fri 19 Jul, 2024 - 2:55 PM ET
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CVC Credit Partners European Direct Lending Fund III (Levered and Unlevered) SCSp
ֳ - London - 19 Jul 2024: ֳ has assigned CVC Credit Partners European Direct Lending Fund III (levered) SCSp and CVC Credit Partners European Direct Lending Fund III (unlevered) SCSp subscription facilities 'A' ratings. The Outlooks are Stable. The fund was launched in 2021 and is managed by CVC.
The two sleeves have two separate facility agreements and the facilities' obligations are secured by the uncalled capital commitments of the underlying limited partners (LPs).
KEY RATING DRIVERS
The ratings are supported by the quality and diversity of the LPs, the relatively high facility advance rate and the short facility tenor, which together result in quantitative rating indications (QRIs) after adjustments of 'BBB+' for both facilities. The ratings are also supported by the manager's strong resources, franchise, historical experience, the high level of funded commitments and LPs' strong economic incentives to meet future capital calls.
The qualitative assessment, which applies to both facilities, was scored at '1', resulting in a two-notch uplift being applied to the QRIs and resulting in final ratings of 'A' for both facilities.
Limited Partner Pool Quality
The LP pools of the levered and unlevered sleeves are not cross-collateralised between the two sleeves, and therefore ֳ analysed each sleeve on a standalone basis and assigned separate ratings. The borrowers within each sleeve cross-collateralise each other. The co-invest sleeves related to the fund (CVC Co-invest levered facility and CVC Co-invest unlevered facility) are excluded from the analysis, as they are subject to a separate facility agreement.
As of March 2024, the levered sleeve's LP pool was relatively concentrated, with 36 investors and a Herfindahl- Hirschman Index (HHI) of 1,193, albeit of good credit quality. The largest LPs are mainly pension funds and sovereign wealth funds, mainly domiciled in North America, Asia-Pacific, and the Middle East. ֳ applied its Tier classification framework to derive rating assumptions for unrated investors, which represent 41.9% of the LP pool. ֳ notched down the ratings of 11 LPs in the levered sleeve that either committed capital through investment vehicles or have side letters with the fund that include provisions that ֳ deems negative for the lender. These LPs make up 81.5% of the analysed pool's total commitments.
As of the same date, the unlevered sleeve's LP pool was more diversified, with 70 investors and an HHI of 385. The LPs are mainly pension funds, investment funds and insurance companies, mainly based in Europe, Asia, and the Middle East. ֳ applied its Tier classification framework to derive rating assumptions for unrated investors, which represent 85.6% of the LP pool. ֳ notched down the ratings of five LPs in the unlevered pool that either committed capital through investment vehicles or have side letters with the fund that include provisions that ֳ deems negative for the lender. These LPs make up 13.7% of the analysed pool's total commitments.
Quantitative Rating Indication
The baseline QRIs for both sleeves are 'A', driven by the respective LP pools' credit quality and concentrations, the 12-month modelled exposure period and maximum advance rates of 80.4% and 83.4% for the levered and unlevered sleeves, respectively. The 12-month modelled exposure period reflects ֳ's minimum time horizon assumption for QRIs. The QRIs for both sleeves are somewhat sensitive to negative changes in the LP pool, and on this basis, ֳ adjusted both QRIs down by two notches to 'BBB+'.
Qualitative Assessment
The facilities are related to parallel funds that invest the same assets, and have their own limited partnership agreements and facility agreement with no material differences. The facilities are operated by the same manager under the same strategy. As such, the QA scores for both sleeves are equivalent.
The Qualitative Assessment (QA) scores for the levered and unlevered sleeves are '1', reflecting the manager's strong resources and scale, franchise, historical performance, and high level of funded commitments. The QA scores of '1' results in two notch uplift being applied to the adjusted QRIs, and resulting in a final rating of 'A' for each sleeve.
Caps and Limits
The facility rating is capped at 'AA+' as more than 20% of the LP base exposure is to unrated investors.
INVESTMENT MANAGER
As of June 2024, CVC had approximately EUR193 billion of assets under management, across seven investment strategies including private equity, secondaries, credit, and infrastructure. CVC's Credit platform has assets under management of EUR42 billion.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Deterioration in the diversification or credit profile of the LP pool that result in sustained baseline or adjusted QRIs lower than those relied upon at the time of the most recent rating action.
- Sustained deterioration of fund performance and/or underlying investment values.
- A material deterioration in the manager's investment and operational capabilities.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Increases in the percentage of underlying LP pools that are explicitly rated above 80% could result in an upgrade. However, ֳ views this as unlikely since not many LPs are explicitly rated and the fund has held its final close.
- Improvement in the diversification or credit profile of LP pool that result in sustained baseline or adjusted QRIs higher than those relied upon at the time of the most recent rating action.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Portfolio Credit Model, v2.16.2 (21 Jul 2023, 08 Jun 2023)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| CVC Credit Partners European Direct Lending Fund III (Levered) SCSp | UK Issued, EU Endorsed |
| CVC Credit Partners European Direct Lending Fund III (Unlevered) SCSp | UK Issued, EU Endorsed |
