RPT-Fitch: PE securitizations delevering despite slow M&A activity

Thu Dec 12, 2013 8:50am EST

Dec 12 (Reuters) - (The following statement was released by the rating agency)

A steady buildup of cash reserves among Fitch Ratings' rated private equity (PE) securitizations, known as PE collateralized fund obligations (PE CFOs), has led to lower fund leverage.

Over the last two years, fund distributions have picked up across transactions due to the better exit environment and the seasoning of portfolio investments. A strong U.S. equity market is a primary driver, as strategic acquisitions are more interesting as potential for higher equity return increases.

A majority of PE CFOs had been issued in the years preceding the 2008-2009 financial crisis. Fitch rates Tenzing, SVG 1 and SVG 2. PE CFOs had net asset value (NAV) lows occurring in mid-2009.

Since that time, PE CFOs have seen a rebound in underlying fund valuations, in addition to a "topping off" of required cash reserves, due to steady distribution streams and decreasing fund commitments.

Vintage seasoning in the CFOs has also played a part in distribution activity. Most pre-crisis PE CFOs have positions in underlying funds of older vintages that have been extended beyond their anticipated fund lives. The general partners of the underlying PE funds tend to see little upside in holding these older assets, so it seems an opportune time to sell, increasing exit activity and, ultimately, increased CFO distributions.

PE CFOs that meet cash reserve requirements are then typically able to use the cash proceeds from underlying fund exit activity to commence principal redemptions sequentially, beginning with senior tranches in the capital structure. Two of Fitch's rated PE CFOs have redeemed senior classes in full, resulting in increased credit enhancement to lower classes and overall lower fund leverage.

While the amortization of these classes has occurred at a slower rate than originally anticipated at issuance due to a slow rebound in M&A activity, it nonetheless represents a positive milestone for transactions that had experienced significant credit enhancement deterioration during the crisis.

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