Dec 12 (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
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.