Research: Rating Action: Moody’s assigns a Baa3 rating to new notes issued by HPS A-Life Direct Lending Fund, LP

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New York, August 01, 2022 — Moody’s Investors Service (“Moody’s”) has assigned a Baa3 rating to the Revolving Floating Rate Notes to be issued by HPS A-Life Direct Lending Fund, LP (the “A-Life Fund”) in a private placement. The Notes are issued to Limited Partners of the A-Life Fund such that a Limited Partner’s capital commitment to the A-Life Fund will be in the fixed ratio of 75% Notes: 25% Limited Partner Interest. Use of the proceeds from the offering of the Notes will be invested in two direct lending strategies managed by HPS Investment Partners, LLC (“HPS”), namely Core Senior Lending and Specialty Lending (the “Direct Lending Strategies”) .

The following scoring actions were taken:

Issuer: HPS A-Life Direct Lending Fund, LP

Floating and revolving rate notes, Baa3 allocated

Outlook: no Outlook is assigned

RATINGS RATIONALE

The Baa3 rating assigned to the Notes reflects the risk-adjusted (as adjusted) asset coverage and leverage of the A-Life fund, as well as the substantial issuer and sector diversification of the direct lending strategies. HPS has a strong track record as a senior secured direct investor with minimal defaults and cumulative losses over time, which supports the investment grade rating. The interest payment obligations of the A-Life fund should be adequately covered by the income generated by the investments of the direct lending strategies.

Interest paid on the Notes will be fixed at a forward SOFR of three months plus 5.00% (per annum), payable quarterly. Interest on the Notes, at the option of the Issuer, may be deferred, and no further interest will accrue on amounts which have been deferred. The term of the Notes is the date of liquidation of the A-Life Fund, which is fourteen years from the Closing Date, which may be accelerated if the A-Life Fund is liquidated at an earlier date. The typical effective life of investments in the fund is expected to be less than 3 years, although the actual maturities of the underlying investments may be longer. Capital can be called up from investors and investments can be made, usually during the fund’s commitment period, which lasts seven years from the closing date.

In reviewing the A-Life fund’s risk-adjusted asset hedge, Moody’s considered the forward amounts of the combined assets of the direct lending strategies, which are valued based on unobservable inputs. In addition, Moody’s considered the risk of loss of direct lending strategies’ assets and their potential to generate net income under stressed conditions to assess the adequacy of free cash flow to manage and repay tickets. After the fund’s commitment period, noteholders benefit from an interest coverage ratio test which requires distributable proceeds to be greater than 150% of accrued and unpaid interest. In the event of a default, the fund will make prepayments to Noteholders until the Notes are redeemed or the default is cured.

The asset profile of the A-Life fund is considered low. The credit profile of its investments is generally speculative grade and, as private investments, they are considered illiquid. The asset allocation will be approximately 75% to the Specialized Lending strategy and approximately 25% to the Senior Senior Loan strategy. In these strategies, the assets are primarily senior secured senior loans to borrowers that the HPS funds and accounts have secured or are initiated by private equity sponsors. However, HPS has a strong track record as a senior secured direct investor with minimal defaults and cumulative losses over time, which supports the investment grade rating.

Among direct lending strategies, the HPS specialty lending strategy targets a moderately more leveraged loan portfolio and progressively higher yields. Conversely, the investment objectives of the main senior loan strategy are slightly less leveraged and generate lower returns.

The combined assets of direct lending strategies are broadly diversified and exhibit very low concentration ratios when measured by both sector and issuer.

The fixed charge coverage ratio, which compares the net investment income of the direct lending strategies, less management fees and other fund expenses, to the interest paid on the notes is adequate. Interest income generated from direct lending strategies is largely based on floating rate investments, which helps to mitigate any increase in interest expense due to an increase in SOFR.

Fund characteristics and structural considerations of the note issue, combined with Moody’s view of the fund manager’s track record and performance, inform our view of governance risk within Moody’s ESG framework, which is a key driver of the rating action.

RELATIVE PRIORITY OF CLAIM

In addition to assessing the key rating factors described above, Moody’s considers the claim priority of specific types of securities of a closed-end fund and any other qualitative factors relevant to the Fund’s credit profile. In the case of the A-Life fund, the notes represent a single class of liability, and the assigned rating therefore reflects the fund’s senior credit profile. However, Moody’s generally considers a unitranche structure to be less protective for senior debt, as there are no subordinated debt to absorb the risk.

FACTORS THAT MAY LEAD TO IMPROVED OR DEGRADED RATINGS:

Factors that could lead to an upgrade include stronger than expected credit performance leading to better risk-adjusted asset coverage and improved fixed charge coverage of the A-Life fund.

Conversely, a downgrade could occur as a result of weakening credit performance and fixed charge coverage.

The main methodology used in this rating was the closed-end fund methodology published in December 2020 and available on https://ratings.moodys.com/api/rmc-documents/69686. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

This rating is requested. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Neal M. Epstein, CFA
VP – Senior Credit Officer
Funds and Asset Management Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Robert M. Callagy
Associate General Manager
Funds and Asset Management Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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