CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken various rating actions on the following five classes of floating- and fixed-rated secured notes issued by SVG Diamond Private Equity plc (SVG), a securitization of existing limited partnership interests and future commitments to private equity funds which is managed by SVG Advisers Ltd.:
--EUR15,000,000 class C upgraded to 'AAsf' from 'Asf'; Outlook Stable;
--EUR40,000,000 class M1 upgraded to 'BBsf' from 'Bsf'; Outlook Stable;
--$49,000,000 class M2 upgraded to 'BBsf' from 'Bsf'; Outlook Stable.
The following classes have been marked Paid-in-Full (PIF):
--EUR58,500,000 class B1;
--$26,300,000 class B2.
KEY RATING DRIVERS
--Stabilization of the fund's underlying fund values from 2009 lows;
--Increase in asset coverage for rated liabilities through class B full principal amortization;
--Adequate near-term liquidity relative to unfunded commitments.
NET ASSET VALUE & CREDIT ENHANCEMENT (CE)
Between July 31, 2013 and July 31, 2014, SVG's net asset value (NAV), as reported by the ratio of net assets to preferred equity share, increased to 1.75 from 1.58, according to the respective trustee reports, as the fund continued its rebound from mid-2009 valuation lows. The NAV performance since then was in line with Fitch's expectations since the September 2013 review. CE (subordination) levels for all classes of notes have increased due to full redemption of the class B notes in March 2014 and the increased NAV. Due to the class B redemption, class C noteholders now assume senior status in the capital structure and are entitled to all proceeds used for principal amortization in full prior to payments to subordinate classes.
According to the July 31, 2014 trustee report, SVG's unfunded commitment exposure was reduced by EUR14.1 million from the prior review to an outstanding balance of EUR48.3 million. As of the same date, this amount was covered by cash/liquid investments of EUR72.8 million. SVG's cash reserve accounts have now been built up to a point where they have replaced the fund's liquidity facilities. Minimum reserves are sized at 78.57% of unfunded commitments and six months of senior expenses. The increase in reserve account amounts reflects the strong performance of the fund's incoming cash flow distributions from its underlying private equity funds.
The ratings assigned to the class C notes address the likelihood that investors will receive timely payment of interest and ultimate repayment of principal. The ratings assigned to the class M notes address the likelihood that investors will receive ultimate payment of interest and principal.
In line with the analytical approach outlined in the criteria report titled 'Rating Market Value Structures' dated Sept. 4, 2014, Fitch undertook additional analysis specific to the SVG transaction and its underlying collateral. Specifically, Fitch's loss assumptions were based on historically observed peak-to-trough losses from venture capital and buyout valuation indices. The index data included the 2000 - 2002 time period (the tech bubble), when venture capital had significantly higher valuation increases and suffered material subsequent losses. For buyout funds, these index data included the 2005 - 2007 time period, when leverage and valuations for buyout transactions increased significantly leading up to the financial crisis, and were subsequently followed by material mark-to-market losses during the 2007 - 2009 time period.
Based on observed historical price declines, as well as the transaction's portfolio composition and vintage diversification, a base-line loss assumption of approximately 33% was applied to all classes of notes and subtracted from their current levels of CE. The remaining CE was then compared to different rating stresses to determine the appropriateness of existing ratings. The loss assumptions were increased (decreased) from these levels when evaluating higher (lower) rated securities. Going forward, Fitch will continue to track actual gains or losses from portfolio investments on an ongoing basis and adjust its base case loss assumptions accordingly.
SVG is a securitization of existing limited partnership interests and new commitments to private equity funds. Because SVG has begun its amortization period, the fund does not currently have the ability to enter into new commitments but may fund remaining undrawn commitments.
As of July 31, 2014, approximately 98% of the portfolio was invested in buy-out funds while the remaining 2% was invested in venture capital funds. The transaction was invested in 63 funds managed by 42 managers, with fund vintages ranging from 1993 - 2008, and over 50% invested in funds of a 2005 or later vintage. As of the same date, the portfolio was meeting all of its diversification guidelines in terms of exposure to individual managers, funds, vintages and currencies.
SVG is managed by Aberdeen SVG. Headquartered in London, Aberdeen SVG is a jointly owned venture between Aberdeen Asset Management PLC and SVG Capital plc. As of June 30, 2014, Aberdeen SVG had assets under management or advice of EUR5.8 billion.
RATING SENSITIVITIES AND SURVEILLANCE
Going forward, the assigned ratings may be sensitive to material changes in the values of the underlying private equity fund investments and the impact these have on SVG's overall NAV and liquidity relative to the rated liabilities. Furthermore, ratings may be influenced by the rate at which unfunded commitments are drawn, the rate at which gains (or losses) on existing private equity investments are realized, overall economic conditions, and Fitch's assessment of how these factors may influence performance for a given point in time as well as on a going-forward basis. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch ratings guidelines for market value structures, please review the criteria referenced below, which can be found on Fitch's website.
Fitch seeks monthly portfolio holdings information and semi-annual financial statements for the fund from The Bank of New York Mellon (trustee) and Aberdeen SVG, respectively, to conduct surveillance against ratings guidelines and maintain its ratings.
The sources of information used to assess this rating were the public domain and SVG Advisers Ltd.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Market Value Structures' (Sept. 4, 2014).
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research:
Counterparty Criteria for Structured Finance and Covered Bonds
Rating Market Value Structures