More common in Europe, the prevalence of obtaining credit ratings for subscription credit facilities has increased in the United States. In this Legal Update, we explain the increasing use of credit ratings for a subscription credit facility, factors that impact the credit rating, the benefits of a subscription credit facility credit rating, and what to consider if pursuing a subscription credit facility credit rating.
Background
Rating agencies typically provide credit ratings for most of the investors whose capital commitments serve as collateral for subscription credit facilities, but, until recently, it had been relatively uncommon for a US subscription credit facility itself to obtain a credit rating. While more familiar in the European market due to insurance companies participating in subscription credit facilities originated by European lenders, there has been a recent increase in rated subscription credit facilities in the United States as well. As noted by KBRA in its recent report on subscription credit facility credit ratings, the increased use of credit ratings for subscription credit facilities is driven in part by an increase in alternative capital providers in the market, some of whom prefer to invest in rated investment products because of regulatory requirements and favorable capital reserve requirements, such as regulated insurance companies. As market forces have reduced the amount of available capital provided by traditional financial institutions, sponsor demand for funding from alternative sources such as insurance companies is expected to grow.
KBRA currently maintains active ratings on more than 40 subscription facilities, including traditional capital call and hybrid facilities, with credit ratings ranging from BBB to AA- for such facilities. In addition to KBRA, Fitch recently published an exposure draft of their rating criteria for subscription credit facilities and we understand Fitch will start rating subscription facilities soon.