- Banks and insurers are making more requests to U.S. credit agencies for ratings on their risky loans to private equity funds that are secured against the value of their portfolio investments and cash flows that come from them.
This activity has raised concerns about so-called leverage on leverage in private credit, a growing area of private fund finance. These loans have a shorter history in comparison to other types as their demand and wider use rose only in the last few years as exits through asset sales became harder in a higher-for-longer rate environment."We expect the approximately $150 billion in NAV facilities that some market participants have currently seen in the market to double within the next two years," S&P said in a recent report.
The agency's analytical process includes an evaluation of a fund manager’s performance history, valuation process track record, the legal structure and security provisions of the NAV loan, he said. "We begin by haircutting the value of the fund by 40-60% depending on whether the assets are private equity, listed equity or a bond portfolio to ascertain whether the fund would still have the capability to pay its debt in a severe stress scenario," said S&P's Nik Khakee, methodologies managing director.