While new securitization vehicles will often feature some level of bond insurance policy to draw in investors, Aon Corp.'s Private Equity Partnership Structures I, via CIBC World Markets, was structured for an unwrapped double-A rating with non-surety, innovative credit enhancement, perhaps signifying maturation of this type of asset class and its investor audience.
CIBC has been active in the CDO sector marketing PEPS I to investors for several months, sources said. The transaction, which has yet to close, employs a commitment to meet future cash flow calls by its sellers, a unique characteristic when compared to previously issued private equity-related vehicles, such as Princess Private Equity Holding and Pearl Holding.
Seeking to issue $619 million in securities, PEPS is a registered 144A supported by a portfolio of limited partner interests in 53 private equity funds involving 664 companies across ten industries. In this diversified pool of assets, the majority of the limited partnership (LP) interests, 78%, were commitments in buyout, or LBO funds, with real estate commitments comprising 20%; venture capital and mezzanine commitments comprised one percent each. The portfolio is static and PEPS I was also registered as a Euro Private Placement.
The portfolio was derived from Combined Insurance Company of America and Combined Specialty Insurance Company, both subsidiaries of Aon. Those entities received 62% of the structure in the form of subordinated securities. Reportedly the sellers moved for the securitization because they are looking to reduce their regulatory risk capital requirements.
While PEPS is far from the first in its field to offer up LP stakes, it is unique in that the structure of the vehicle did not seek a wrap. To support future capital calls - which requires LPs to fund more cash into the investments - PEPS will issue subordinated bonds when it needs to meet future capital calls.
"It works because there's a contractual relationship with the two subsidiaries [of Aon] to buy those bonds when they're issued," said Michael O'Connor, senior vice president, Moody's Investor Service.
Generally speaking, as an asset class becomes more mainstream, fewer investors clamor for the protection of a wrap. If the PEPS I deal gets completed, it would signify a shift in investors willing to partake in private equity-related vehicles. The change in attitude is noteworthy as the ABS market, for some time now, has touted securitization as a viable solution to the woes felt in the private equity and venture capital raising markets, which have sunk steadily since the popping of the tech bubble in 2000.
On the other hand, the decline of the private equity arena has been a sore spot for prospective investors, said one source.
"No one is beating down the door to get pieces of this stuff yet. The press isn't great on private equity over the last few years," the source said. "But I wouldn't call it fear of private equity."
The deal carries seven tranches and, unlike previous PE securitizations, PEPS consists of assets already generating cash flow - as mid-year, about $39.23 million had accumulated in a cash reserve account, which is acting as both underwriter and placement agent.
According to investors, $170 million in class A1 senior notes, rated AA-'/'Aa3' by Moody's/Standard & Poor's, carry 2.85 average life/10-year final paper priced at (3 month) Libor + 1.70%. Sixty-five million in class A2 Senior Notes, rated A-'/'A3', carry a 2.57-average life/10-year final paper priced at (three-month) Libor + 2.50%.
The subordinated structure breaks down as follows: $50 million in B2 notes, rated BBB'/'Baa2' with a 12-year final; $169 million in notes rated BB-'; Class P1 is comprised of $105 million in notes rated B-'; $59 million in P2 notes are unrated as is the $1 million common tranche, units owned by Grant Park Capital LLC.
Capital structure for PEPS I was set back in December 2001; however, it was not rated by Moody's until April 2002, O'Connor said. The lag time between now and then is far from unexpected, he added.
"It's a new asset class for securitization and it takes time with complicated new asset classes. When any other addition to the standard type of security comes out, investors need time to go through it," said O'Connor