KBRA Assigns Ratings to Glendower Capital Secondaries CFO, LLC

KBRA assigns ratings to the $57.9 million Class A Loans, $17.4 million Class B Loans, and $11.6 million Class C Loans (the “Rated Debt”) issued by Glendower Capital Secondaries CFO, LLC (in such capacity, the “Issuer”). Proceeds of the Rated Debt along with $29.0 million of unrated Subordinated Loans will be used by the Issuer to commit and finance $115.8 million of capital commitments to funds pursuing Glendower’s private equity secondaries strategy (the "Underlying Funds"). A full rating report which covers KBRA’s analysis in greater detail will be published upon the final close of the Underlying Funds.

Key Credit Considerations

• Asset Coverage: The initial draws on the debt will be drawn at advance rates of 50%, 15%, and 10% for the Class A Loans, Class B Loans and Class C Loans, respectively. This equates to an asset coverage of 200% (50% LTV), 154% (65% LTV), and 133% (75% LTV), respectively.

• Transaction Structure: The transaction consists of several notable structural features which contribute positively to the credit risk for Rated Debt investors. These include but are not limited to a Borrower Reserve Account, loan to value (LTV) tests which accelerate Rated Debt amortization, and a Minimum Net Asset Value (NAV) test which accelerates the repayment of the Rated Debt if the NAV of the Fund were to decline below a material threshold, either due to underperformance or asset concentration.

• Delayed Draw Funding Structure and Equity Funding Risk: The transaction is funded via a delayed draw structure, whereby capital is called from the Rated Debt and Subordinated Loans pro-rata, with the Rated Debt and the Subordinated Loans fully funded by the first anniversary of the closing date. This feature could expose Rated Debt investors to investor credit risk to the extent a participant in the structure does not fund a required draw. KBRA has considered this factor in its analysis of the credit risk of the Rated Debt.

• Manager Review and Track Record: Established in 2006 with offices in London and New York, Glendower Capital has successful raised multiple vintages of secondary-focused funds with demonstrated consistency of capital raising, deployment, and performance. Glendower employs over 80 professionals and since inception, has raised over $11 billion in committed capital across five funds and affiliated vehicles.

Rating Sensitivities

• Significant Underperformance of Underlying Funds: Significant deterioration in portfolio valuation or a trend of collateral cash flows that are notably lower than current forecasted performance could adversely affect the ratings assigned to the Rated Debt.

• Deterioration of Investor Credit Quality: A deterioration in the credit quality of the Rated Debt and/or the Subordinated lenders increases funding risk and thus, could result in a downgrade to the Rated Debt.

• Increase to Asset Coverage: Significant de-leveraging of the Rated Debt that decreases LTV coupled with stable or better than expected collateral performance could positively impact the ratings assigned to the Rated Debt.

Quantitative Rating Determinants

Asset Quality

The Underlying Funds are expected to consist of Secondary investments in private equity funds, which KBRA views as a complex and illiquid asset class. In KBRA’s view, these investments carry an asset quality score consistent with equity-like risk.

Asset Coverage

The initial draws on the debt will be drawn at advance rates of 50%, 15%, and 10% for the Class A Loans, Class B Loans and Class C Loans, respectively. This equates to an asset coverage of 200% (50% LTV), 154% (65% LTV), and 133% (75% LTV), respectively.

Liquidity

KBRA considered the liquidity profile of seasoned limited partnership interests in private equity funds. These assets tend to be complex and challenging to evaluate. The price discovery of these investments is generally somewhat stronger than private interests in companies outright or private limited partnership interests in more infrequently traded asset classes. Therefore, KBRA considers liquidity risk as being consistent with other illiquid financial instruments that are actively traded privately.

Duration

KBRA considered the weighted average remaining term of the investments within Glendower’s managed funds. This resulted in a duration score consistent with the 3-7 year range.

Cash Flow Analysis

KBRA conducted a comprehensive analysis of transaction structure and cash flows to determine the ability of the Portfolio Asset distributions to fulfill capital calls, accrued interest, and ultimate principal due under the transaction terms. The results of this cash flow analysis would suggest that the Class A Loans can withstand asset underperformance consistent with the weakest observed private equity funds based on publicly available data. Similarly, the Class B Loans can withstand underperformance consistent with historically observed third quartile levels of private equity performance. The Class C Loans can consistently withstand performance consistent with median levels of observed private equity performance. These observed levels of performance resiliency are consistent with the ratings assigned to the Rated Debt.

Qualitative Factors

Manager Review

Glendower Capital is a private equity firm focused on secondary private markets globally with $13 billion of assets under management. The Firm has an investment strategy that is focused on delivering strong and consistent performance and has executed a value investing bottom-up approach to secondaries since 2006. Glendower is led by six founding partners who have worked together for over 18 years. The senior team has extensive cross-border experience and has demonstrated the ability to successfully work together over the long term, including across multiple economic cycles. The investment team has demonstrated consistent deployment, underwriting, and performance capabilities through five vintages of private equity secondary focused funds dating back more than 15 years.

Other Qualitative Factors

KBRA’s qualitative considerations consider the strength of the transaction structure and the ability for the Class A Loans to withstand meaningful levels of underperformance consistent with levels of stress in private equity rarely observed.

To access rating and relevant documents, click here.

Related Publications

• 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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