RPT-Fitch: Funds Increasingly Offer Alternative Financing Routes; Rating Criteria Published

Mon Mar 18, 2013 7:37am EDT

March 18 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings expects funds to become increasingly important vehicles of finance in the face of banks' balance sheet rationalisation. As such Fitch has published criteria for assigning issue level ratings to debt (senior or subordinated securities or loan facilities) and/or preferred securities issued by closed-end funds (CEFs) outside the US. CEFs, in the form of Limited Partnerships, Investment Trusts, Irish QIF or Luxembourg SIF, are becoming popular as alternative financing vehicles in many jurisdictions as banks face higher capital requirements for certain assets. As banks restructure their financing activities, portfolios of assets are removed from balance sheets and financed by institutional capital owners (pension funds or insurance companies) and Fitch expects this trend to continue. Assets such as shipping finance, leveraged loans, commercial real estate loans and project finance loans require banks to hold more capital. As a result, banks are increasingly focusing on origination with institutional investors providing financing via mandates or funds, under the so-called "syndicate to originate" approach. When the fund issues debt, the equity tranche can be retained by the bank or sold to investors in search of higher returns. The debt can also serve for working capital. Fitch's ratings of the debt issued by non US CEFs are primarily based on an analysis of the portfolio's key risk factors relative to the maximum allowable level of leverage. The fund's portfolio assets are evaluated by the relevant analytical team at Fitch, with a focus on the level of potential market value/credit loss, sufficiency of asset coverage relative to leverage, and structural protections available to the rated obligations. Cash flow analysis of the fund's assets under various stress and timing scenarios is applied to evaluate the ability of the fund's capital structure to absorb losses and the portfolio to service the rated debt/preferred security in full and on time. Fitch also models worst case scenarios when the rating is assigned before the end of the fund's investment period or when the fund has latitude to reinvest before the debt matures. Additionally, if the fund's assets mature after the rated debt or preferred obligation or when a mandatory early liquidation of the assets is possible, Fitch overlays its cash flow analysis with a market value analysis to evaluate whether the liquidation value of the portfolio is sufficient to cover the debt principal and interest. Fitch also reviews the structural protections embedded in the fund's offering documents or as part of lending covenants as well as the legal/regulatory structure, including the fund's regulatory framework, segregation of assets, governance and third party relationships. Fitch analyses to what degree debt or preferred security holders have timely recourse to the fund's assets, through a strong, well-defined legal claim that reflects their seniority in the capital structure and in the waterfall of payments. Finally, Fitch assesses the capabilities of the manager, including its staffing, processes and operational controls, given its role in asset selection and substitution, maximisation of value, working out/selling troubled assets and monitoring. Fitch will be holding a teleconference to discuss the new criteria at 2pm UK time on Wednesday 20 March. Participants should register to attend the call under the following link.The criteria report, entitled "Rating Debt and Preferred Securities Issued by Non-US Closed-End Funds" is available at www.fitchratings.com or by clicking the link below. Link to Fitch Ratings' Report: Rating Debt and Preferred Securities Issued by Non-US Closed-End Funds

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