KBRA Assigns Ratings to Sagard Senior Lending Partners RN-U LP
KBRA assigns a BBB rating to the Class A Notes, a BBB- rating to the Class B Notes, and a BB- rating to the Class C Notes (together, the "Notes") issued by Sagard Senior Lending Partners RN-U LP (the "Issuer", "Borrower", or "Partnership"). Proceeds of the Notes along with the LP Interests will be used by the Partnership to invest primarily into direct lending assets to middle market companies.
Key Credit Considerations
- Asset Coverage: The Class A Notes, Class B Notes, Class C Notes, and LP Interests will be drawn on a pro-rata basis at a ratio of 60%, 10%, 15%, and 15%, respectively, to make investments. As a result, the Notes are expected to have initial loan to values ("LTV")/asset coverage of 60.0%/166.7%, 70.0%/142.9%, and 85.0%/117.6% for the Class A Notes, Class B Notes, and Class C Notes, respectively.
- Transaction Structure: The transaction consists of structural features which contribute positively to the credit risk for Noteholders. These include the excess spread in the transaction which helps the portfolio sustain greater defaults in stress scenarios, while still maintaining sufficient cashflows to meet all interest and principal obligations due under the Notes. Additionally, post commitment period, all cashflows from the underlying assets after the Notes interest is paid will be used to de-lever the Notes sequentially. As such, post commitment period, no proceeds will be distributed to the LP Interests until the Notes have been paid in full.
- Potential Maturity Mismatch of Underlying Loans and Partnership Life: At full deployment, the portfolio is expected to be comprised of loans with legal tenors ranging from four to six years in length. To the extent the Partnership is not extended to a term commensurate with the remaining term to maturity of the underlying loans, the Partnership could be in a position of a forced seller and thus subject to market value / liquidity risk.
- Manager Review: Sagard is a multi-strategy alternative asset management firm with more than US$15.7B under management, 125 portfolio companies, and 350 professionals. The Firm has offices in Canada, the United States, Europe and the Middle East.
Rating Sensitivities
- Significant Increase in Asset Coverage: A rating upgrade may occur if there is stable Partnership performance and significant de-leveraging of the Notes driven by repayment of the Notes, thereby increasing asset coverage/decreasing LTV.
- Underperformance of Partnership Collateral: A rating downgrade may occur if the Partnership's collateral exhibits sustained underperformance as evidenced by deteriorating portfolio asset quality, loan level defaults and/or delinquencies, increased Notes' LTV, or sustained periods of interest deferrals due to Noteholders.
- Underlying Borrower Credit Quality: A rating upgrade may occur if the overall weighted average credit quality of the underlying borrowers increases over time.
- Final Portfolio Composition Inconsistent with Expectations: In the event the final portfolio does not reflect a similar size, diversity, yield, and credit profile as expected, KBRA's view of the underlying loans' asset quality may change, which may impact the ratings assigned.
Investment Fund Debt Rating Determinants
Quantitative Determinants
- Asset Quality: KBRA analyzed the assets that currently are in the portfolio and additional assets that were originated by Sagard that would fit the profile for the Partnership's mandate. Based on this analysis and expectations for future investments, KBRA has estimated the weighted average portfolio asset quality to be equivalent to ?b-' credit risk.
- Asset Coverage: As part of this transaction, the Class A Notes, Class B Notes, Class C Notes, and LP Interests are drawn on a pro-rata basis at a ratio of 60.0%/10.0%/15.0%/15.0% as the Partnership issues capital calls to make investments. As a result, the Class A Notes have an asset coverage of 166.7%, the Class B Notes have an asset coverage of 142.9%, and the Class C Notes have an asset coverage of 117.6%.
- Liquidity: The Partnership is expected to hold investments for which no public market exists or are thinly traded. As a result, the valuations for these investments are generally reliant on the valuation methodologies of Sagard. The Partnership utilizes an independent third-party valuation agent to value all investments on a quarterly basis.
- Duration: The Partnership's investments are expected to be comprised of loans with legal tenors ranging from four years to six years in length. Therefore, KBRA has assigned a ?3-7' year duration for this rating determinant.
- Cash Flow Analysis: KBRA's analytical team performed an analysis of the transaction's cash flows as well as an assessment of breakeven loss rates to determine the level of stress the investments of the Partnership can absorb. KBRA analyzed the cash flows of the Partnership considering the information provided by Sagard and applied default probabilities and recoveries to each loan based on the individual credit quality score and lien type of each investment. Defaults to the underlying portfolio were determined using a distributed default approach commensurate with the expected cumulative default patterns of KBRA's idealized default rates. The observed levels of performance resiliency are consistent with the ratings assigned to the Class A Notes, Class B Notes, and Class C Notes.
Qualitative Factors
- Manager Review: Sagard is a multi-strategy alternative asset management firm with more than US$15.7B under management, 125 portfolio companies, and 350 professionals. The Firm has offices in Canada, the United States, Europe and the Middle East.
- Other Factors: KBRA's rating assignment considers the strength of the cash flows and structural protections not sufficiently captured in the cash flow determinant. At the Class A rating level, the Class A Notes can sustain greater than a 2.0x default multiple of the default performance consistent with the credit quality of the portfolio.
ESG Considerations
KBRA typically analyzes Environmental, Social, and Governance (ESG) factors through the lens of how management teams plan for and manage relevant ESG risks and opportunities. More information on KBRA's approach to ESG risk management when evaluating funds can be found here . Over the medium-term, funds and other financial institutions will need to prioritize ESG risk management and disclosure with the likelihood of expansions in ESG-related regulation and rising investor focus on ESG issues.
KBRA analyzes many sector- and issuer-specific ESG issues but our analysis is often anchored around three core topics: climate change, with particular focus on greenhouse gas emissions; stakeholder preferences; and cybersecurity. Under environmental, as the effects of climate change evolve and become more severe, issuers are increasingly facing an emerging array of challenges and potential opportunities that can influence financial assets, operations, and capital planning. Under social, the effects of stakeholder preferences on ESG issues can impact the demand for an issuer's product and services, the strength of its global reputation and branding, its relationship with employees, consumers, regulators, and lawmakers, and, importantly, its cost of and access to capital. Under governance, as issuers continue to become more reliant on technology, cybersecurity planning and information management are necessary for most issuers, regardless of size and industry.
- Environmental Factors: Environmental factors have the potential to affect Investment Fund debt ratings, but their relevance can vary depending on the characteristics of the underlying collateral, the structural features of the rated debt, and/or qualitative aspects of the transaction.
- Social Factors: An analysis of social factors, such as how the issuer aligns its internal policies and procedures with investor expectations and preferences on ESG issues, is often a key part of KBRA's assessment.
- Governance Factors: Governance is a key component in KBRA's Investment Fund debt rating methodology. Typical governance analysis includes a manager review and an assessment of the legal framework that may direct a manager's actions in each individual transaction.
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Methodologies
Funds: Investment Fund Debt Global Rating Methodology
ESG Global Rating Methodology
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
This credit rating is endorsed by Kroll Bond Rating Agency Europe Limited for use in the European Union and by Kroll Bond Rating Agency UK Limited for use in the UK. Information on a credit rating's endorsement status is available on its rating page at KBRA.com.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
There are certain issuers, entities or transactions rated by KBRA Europe or KBRA UK that may be or have relationships with Shareholders and/or Shareholder-Related Companies, as that term is defined in KBRA's Shareholder and Shareholder Related Companies for KBRA Europe and KBRA UK Policy and Procedure. Relevant disclosure information may be found here.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
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