Nassau turns to PE bonds for investment capital

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Nassau Financial Group is following the lead of a Singapore sovereign wealth fund into the fledgling asset-backed securities class of private-equity bonds.

According to a presale report from Fitch Ratings, Nassau is marketing $263 million in bonds through a collateralized fund obligation (CFO) structure that will pay noteholders from the proceeds of the private-equity fund investments of affiliate Nassau Life Insurance Co.

The Nassau CFO will include two classes of investor notes, to be paid through the cash distributions raised from the income generated by 1,273 underlying investments (including proceeds from exited positions) held by 109 private-equity U.S. funds. The diversified portfolio of funds, which are aged an average of six years, covers about 69 fund managers.

Nassau 2019 CFO LLC is similar to the popular Astrea IV and Astreea V Pte. Ltd. PE bond offerings sponsored by an asset management affiliate of Singapore’s government-owned commercial investment vehicle Temasek Holdings in 2018 and 2019. (Astrea IV was reportedly oversubscribed 7.4 times.)

The funds include a variety of buyout, mezzanine/debt and venture strategy investments of mostly smaller and midsize managers, according to Fitch.

The notes are structured as short-term investments that are scheduled to amortize in approximately two years and nine months, according to the Fitch presale report. But they feature a 15-year legal maturity “which could be supportive in weathering a potential market downturn,” Fitch’s report stated.

The new deal will be “largely static,” according to a presale repot from Fitch Ratings, since the manager (Nassau Alternative Investments) is not allowed to reinvest in new funds after the deal closes.

The $187.8 million in a Class A tranche notes and $75.2 million in a Class B tranche notes total about 70% of the net asset value of the portfolio of $375.7 million in funded commitments and $79.3 million in unfunded commitments (as of June 30). The deal also includes a$112.7 million equity stake.

The difference provides “a sufficient level of credit enhancement” that support a preliminary A rating on the Class A notes and BBB for the Class B notes, according to Fitch. Fitch cautiously caps the ratings at single-A on CFOs “[g]iven the uncertain nature of PE fund distributions and the reliance on market valuations” of the underlying investments.

The notes also are supported by an initial $30 million loan facility that will step down over the life of the transaction. The loan facility will be used to fund capital calls, interest payments and expenses in the event of a cash shortfall as well as provide liquidity backup for potential amortization triggers in the deal.

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