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 affirmed at 'Asf'; Outlook Stable;
--$71,600,000 class A-2 affirmed at 'Asf'; Outlook Stable;
--Eur76,500,000 class B-1 affirmed at 'BBsf'; Outlook Stable;
--$40,000,000 class B-2 affirmed at 'BBsf'; Outlook Stable;
--$47,800,000 class C affirmed at 'Bsf'; Outlook Stable;
--Eur43,000,000 class M-1 affirmed at 'CCCsf';
--$20,300,000 class M-2 affitmed at 'CCCsf'.
SVG II is a securitization of existing limited partnership interests and future commitments to private equity funds that is managed by SVG Advisers Ltd.
KEY RATING DRIVERS:
--Continued stabilization of the fund's net asset value (NAV) from 2009 lows;
--Adequate near-term liquidity relative to unfunded commitments.
NET ASSET VALUE
The affirmations reflect a stabilized NAV since Fitch's last review in October 2011, as well as adequate near-term liquidity relative to unfunded commitments. Between Oct. 31, 2011 and Aug. 31, 2012, the market value of SVG II's invested portfolio increased by 5% to Eur436.7 million from Eur417.1 million, according to the respective trustee reports, as the fund continued its rebound from mid-2009 valuation lows following cost cutting and balance sheet strengthening of underlying portfolio companies. The NAV performance of the transaction has been in line with Fitch's expectations since the October 2011 review.
According to the Aug. 31, 2012, trustee report, SVG II's unfunded commitment exposure was reduced by Eur31.3 million from the prior review to an outstanding balance of Eur78.5 million. This amount is currently covered by cash / liquid investments of Eur35.98 million and undrawn liquidity facilities of Eur108.3 million. 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 liquidity facilities expire on the September 2024 final maturity date of the notes and are currently cash collateralized due to a downgrade event of the facilities provider (Banque AIG, London Branch) on Sept. 15, 2008. Amounts may be borrowed under the facility to fund the payment of senior expenses or fund capital calls provided that the remaining undrawn balance available under the facility would be sufficient to cover senior expenses arising over a six-month period subsequent to the payment of the capital call. SVG II has drawn Eur13.9 million from the liquidity facility to date, according to the Aug. 31, 2012 trustee report.
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 addition to the analytical approach outlined in the criteria report entitled 'Rating Market Value Structures' dated Aug. 15, 2012, 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 38% 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 track actual gains or losses from portfolio investments on an ongoing basis and adjust its 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 Aug. 31, 2012, 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 SVG Advisers Ltd (SVG). Headquartered in London with offices in Boston, MA and Singapore, SVG is a wholly-owned subsidiary of SVG Capital plc. Established in 2001, SVG is a global alternative asset manager focused exclusively on private equity investments. As of June 30, 2011, SVG had private equity funds under management and commitments of Eur3.4 billion. SVG has 45 employees including 16 investment professionals with over 100 years of total private equity experience. SVG is authorized and regulated by the Financial Services Authority in the UK and is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. in the U.S. SVG is also registered with the Securities and Exchange Commission.
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 SVG Advisers, Ltd., respectively, to conduct surveillance against ratings guidelines and maintain its ratings.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and SVG Advisers Ltd.
Applicable Criteria and Related Research:
--'Rating Market Value Structures' (Aug. 15, 2012).
Applicable Criteria and Related Research:
Rating Market Value Structures
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Chicago, IL 60602
Yuriy Layvand, CFA
Brian Bertsch, +1-212-908-0549 (New York)
Source: Fitch Ratings