CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following seven classes of floating- and fixed-rated secured notes issued by SVG Diamond Private Equity II plc (SVG II):
--Eur55,000,000 class A-1 at 'Asf'; Outlook Stable;
--$71,600,000 class A-2 at 'Asf'; Outlook Stable;
--Eur76,500,000 class B-1 at 'BBsf'; Outlook Stable;
--$40,000,000 class B-2 at 'BBsf'; Outlook Stable;
--$47,800,000 class C at 'Bsf'; Outlook Stable;
--Eur43,000,000 class M-1 at 'CCCsf';
--$20,300,000 class M-2 at 'CCCsf'.
SVG II is a securitization of existing limited partnership interests and future commitments to private equity funds that is managed by SVG Aberdeen.
KEY RATING DRIVERS
--Continued stabilization of the fund's net asset value (NAV) from 2009 lows;
--Stability in credit enhancement (subordination) levels;
--Adequate near-term liquidity relative to unfunded commitments.
NET ASSET VALUE
The affirmations reflect a stabilized NAV since Fitch's last review in September 2013, as well as adequate near-term liquidity relative to unfunded commitments. Between July 31, 2013 and July 31, 2014, SVG II's NAV, as reported by the ratio of net assets to preferred equity share, increased to 1.13 from 0.84, according to the respective trustee reports, as the fund continued its rebound from mid-2009 valuation lows. The NAV performance since the October 2013 review was in line with Fitch's expectations.
According to the July 31, 2014, trustee report, SVG II's unfunded commitment exposure was reduced by Eur6.2 million from the prior review to an outstanding balance of Eur53.8 million. This amount was covered by cash / liquid investments of Eur101.6 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 70% 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. Fitch will continue to monitor SVG II's cash position going forward to determine if ratings on any of the above-referenced notes could be affected due to increased capital call activity and/or weak distribution performance.
The ratings on the notes address the likelihood that investors will receive timely payment of interest on the classes A and B notes, ultimate payment of interest on the classes C and M notes and ultimate repayment of principal on all classes of notes. The liquidity facility as noted above has been structured to ensure timely payment of interest and expenses on the class A and B notes.
In line with the analytical approach outlined in the criteria report entitled 'Rating Market Value Structures' dated Sept. 4, 2014, Fitch undertook additional analysis specific to the SVG II 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 (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 credit enhancement. The remaining credit enhancement was then compared to different rating stresses to determine the appropriateness of existing ratings. Going forward, Fitch will continue to track actual gains or losses from portfolio investments on an ongoing basis and adjust base case loss assumptions accordingly.
SVG II is a securitization of existing limited partnership interests and new commitments to private equity funds. Due to a decline in NAV, SVG II entered into an Early Amortization Erosion Event in March 2009 whereby the re-investment period was terminated prior to its scheduled date of March 2011. As such, the fund does not currently have the ability to enter into new commitments but may fund remaining unfunded commitments.
As of July 31, 2014, approximately 84% of the portfolio was invested in buy-out funds while 13% was invested in mezzanine-focused funds and 3% was invested in venture capital funds. The transaction was invested in 75 funds managed by 52 managers, with vintages ranging from 1976 - 2008, and over 81% 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 II 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 SENSITIVITY 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 II'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.
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:
Rating Market Value Structures
Counterparty Criteria for Structured Finance and Covered Bonds