Detailed Rationale

In continuation of change in CRISIL Ratings’ Policy on provisional ratings, the credit opinion of ‘CRISIL AA+ (SO) Equivalent' on capital protection available to Class P unit-holders in the above-mentioned scheme, of a category II Alternative Investment Fund (AIF) has been converted from ‘Provisional CRISIL AA+ (SO) Equivalent’ to ‘CRISIL AA+ (SO) Equivalent’. BPEA Investment Managers Pvt. Ltd (BPEAIMPL) is the investment manager of the scheme.

 

The credit opinion indicates the degree of certainty regarding repayment, by the maturity date of the scheme, of the total capital contribution made to the scheme by Class P unit-holders and our analysis indicates that the capital protection available to Class P unit-holders is commensurate with credit quality of CRISIL AA+ (SO) rated instruments.

 

All distributions, gross of taxes, made to the Class P unit-holders till the final maturity of the scheme, i.e. the quarterly distributions and redemption proceeds at or prior to the maturity of the scheme have been considered as capital repayment for the purpose of this evaluation. While the gross quarterly distributions are considered as capital repayment for this analysis, the same might not be treated similarly for tax computations and hence, the actual cash flows realised by the Class P unit-holders can be materially different depending on tax incidence. Further, the investors should note that any tax incidence has not been factored in our analysis. The rating/credit opinion is not a comment on the scheme’s net asset value at the time of maturity.

 

Distribution to Class E (Class E1, Class E2 and Class E3) and Class UER unit-holders are subordinated to Class P unit-holders on each distribution date (Onshore Investor Units comprise of Class P, Class E and Class UER unit-holders). CRISIL Ratings' evaluation of capital protection for Class P unit-holders in this scheme is based on CRISIL Ratings’ expectation of the credit quality of the underlying investments by the scheme, portfolio composition of the scheme in terms of maturity profile and concentration, structural features and credit support available to Class P unit-holders. CRISIL Ratings will review the portfolio periodically to re-evaluate the capital protection available to Class P unit-holders.

Key Rating Drivers & Detailed Description

Strengths:

• Support available to Class P unit-holders
  • Distributions to Class E and Class UER unit-holders, who will collectively contribute a minimum of 50% of the total commitment called from Onshore Investor Units, are subordinated to the distributions to Class P unit-holders and provide support to the capital repayment of Class P unit-holders.
  • The yield earned by the investments made by the scheme during the term of the scheme will provide additional support to the capital contribution of the Class P unit-holders.
• Credit quality of the investments
  • Based on the investment manager’s Investment Framework letter, a minimum of 75% of the corpus is expected to be invested in entities rated in the investment grade.

 

Weakness:

• Concentration of investments
  • There is concentration risk in the structure with maximum exposure to any entity allowed at 7.5%.
• Liquidity mismatch
  • There is a risk of liquidity mismatch in the structure with 15% of the investments allowed to be in instruments maturing later than the maturity date of the scheme.

Liquidity: Strong

The credit opinion indicates the degree of certainty regarding repayment of the capital contribution made to the scheme by Class P unit-holders, by the maturity date of the scheme. Given that there is no defined repayment schedule for Class P unit-holders’ capital, the capital protection available to the unit-holders would not be materially impacted by temporary liquidity challenges.

 

Rating Assumptions

To assess the total payouts to Class P unit-holders, CRISIL Ratings has factored in the following:

• CRISIL Ratings has assumed correlation of 0.1 – 0.4 for entities in the same industry.
• Post default recovery rate of 0-30% has been considered for different industries.
• Yields on investment has been assumed in the range of 10% - 16%.

 

Based on the potential investment universe and assumptions based on correlation, post-default recovery and yields, CRISIL Ratings considered multiple scenarios for portfolio construction. Portfolio quality in each of the scenario was assessed using Monte Carlo simulations incorporating default probabilities, cash flows, correlations and recovery rate assumptions. With sufficiently large number of trials, portfolio shortfall distribution was generated under each scenario and these were evaluated to arrive at the final credit opinion.

Rating Sensitivity factors

Upward factor:

• Substantially better than expected performance of the investments
• Substantially better than currently anticipated recovery post default from the underlying investments both in terms of time to recovery and amount recovered

 

Downward factor:

• Substantially worse than expected performance of the investments
• Substantially worse than currently anticipated recovery post default from the underlying investments  both in terms of time to recovery and amount recovered
• More than 15.0% of the underlying instrument(s) maturing after the maturity of the fund
• Composition of non-investment grade instrument(s) increasing to more than 25.0% post full deployment

About the Scheme

Investment Universe

Scheme is allowed to invest in debt and debt-like instruments. For investments in instruments other than NCDs (For example OCDs, CCDs, CCPSs, etc.), the Scheme will have adequate exit mechanisms (such as put option) to generate proceeds for distribution to investors. In the event the Scheme ends up owning such instruments, the Scheme will liquidate the instruments through exercise of such mechanism.

.

• Minimum outstanding rating on all the investments to be B and further, minimum 75% investments to be in entities rated BBB- or higher.
• Maximum 15% investments in instruments with maturity later than the maturity date of the scheme.
• Maximum single sector cap of 20% of total deployment
• No investment to be made in floating rate instruments. However, the Scheme may invest in instruments that have fixed coupon rate that can change depending on events subject to a minimum cash coupon and fixed floor IRR.
• No interest moratorium for the investments and minimum blended cash coupon of 10% p.a.
• Income received from underlying investments shall be distributed on a quarterly basis.
• 30%-60% of the commitments received shall be deployed by final closing and remaining within 15 months of final closing

 

Other key covenants

• Minimum proportion of collective contribution by Class E and Class UER unit-holders to be 50% of the total commitment called from Onshore Investor Units.
• Annual operating expenses not to exceed 0.20% p.a. of total commitments received by the Scheme at the time of final closing.
• Annual management fees not to exceed 1.50% p.a. of capital contribution of Class P unit-holders.

 

Waterfall Mechanism applicable to Class P unit-holders

On a quarterly basis, the income proceeds will be apportioned in separate buckets for distribution between units (based on their capital contribution) including

1. Onshore investor units (Class P, Class E (E1, E2 and E3) and Class UER
2. Offshore investor units (Class UP and Class UED)
3. Class S units
4. Class US units

 

The income apportioned for Onshore Investor Units (Onshore Interim Returns Distribution Proceeds) will be distributed on each payout date in the following manner

 

1. Operating expenses up to maximum of 0.20% p.a. of the total commitments received by the Scheme at the time of final closing
2. Management fee up to maximum of 1.50% p.a. of the total contribution received from Onshore Investor Unit holders
3. Unpaid fixed return to Class P unit-holders from previous quarterly distributions
4. Fixed return of 10.5% p.a. to Class P unit-holders for the current quarterly distribution
5. Residual amount will form part of Surplus Onshore Investor Distribution Proceeds which will be further distributed among other unit-holders

 

Redemption Proceeds will be apportioned in separate buckets for distribution between different units (based on their capital contribution) including

1. Onshore investor units (Class P, Class E (E1, E2 and E3) and Class UER
2. Offshore investor units (Class UP , Class UED)
3. Class S units
4. Class US units

 

The distribution proceeds apportioned for Onshore Investor Units will be distributed in the following manner

 

1. Operating expenses up to maximum of 0.20% p.a. of the total commitments received by the Scheme at the time of final closing
2. Management fee up to maximum of 1.50% p.a. of the total contribution received from Onshore Investor Unit holders
3. Redemption of capital contribution made by Class P unit-holders
4. Upon complete redemption of Class P units, the residual amount will form part of Surplus Onshore Investor Distribution Proceeds which will be further distributed among other unit-holders

 

About the AMC

BPEAIMPL was established on 19th September 2016 and provides investment management services to alternative investment funds (AIFs). BPEAIMPL focuses on investing in debt and debt like instruments of established mid-market borrower. The company has 5 directors and 12 employees across functions such as credit, trading, operations, products and investor relations. As on March 31, 2021, as Investment Manager, BPEAIMPL manages the following two funds with total corpus of Rs. 965 Crore.

 

• BPEA Credit Investments Trust II –The total commitment received as of March 31, 2021 is Rs. 711.0 crore. It is a close-ended, long-term fund, primarily focused on providing debt funding to entities
• BPEA Credit India Fund II A –The total commitment received as of March 31, 2021 is Rs. 254 crore. It is a close-ended, long-term fund, primarily focused on providing debt funding to entities.

Key Financial Indicators

As on/for the period ended March 31	Unit	2020 (Audited)	2019
Total Assets	Rs. Cr.	19.4	18.1
Total income	Rs. Cr.	16.1	12.4
Profit after tax	Rs. Cr.	NA	NA
Gross NPA	%	NA	NA
Gearing	%	1.9	0.1
Return on average assets	%	NA	NA

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned
Capital protection available to Class P Unit - holders in BPEA Credit - India Fund III - Scheme T	NA	NA	NA	NA	Highly Complex	CRISIL AA+ (SO) Equivalent