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Fund and Asset Manager Rating Group
www.fitchratings.com August 9, 2019
This presale report reflects information at the time that Fitch’s Expected Ratings are issued and as of the date of this report. Investors should be aware that the transaction has yet to be finalized and changes could occur. Investors should refer to Fitch’s related Rating Action Commentary issued at transaction closing for final ratings. Final ratings will include
an assessment of any material information that may have changed subsequent to the publication of the presale.
PE CFOs / U.S.
Nassau 2019 CFO LLC Presale Report
Transaction Overview
Fitch Ratings expects to rate the class A and B notes issued by Nassau 2019 CFO LLC
(Nassau CFO, or the issuer), as well as the liquidity loan facility available, as displayed in the
table above. Nassau CFO is a collateralized fund obligation (CFO) transaction managed by
Nassau Alternative Investments LLC (NAI) and backed by interests in a diversified pool of
private equity (PE) funds (buyout, mezzanine, debt and venture), with approximately $375.7
million in net asset value (NAV) of funded commitments and $79.3 million of unfunded capital
commitments as of June 30, 2019. Nassau Financial Group is the sponsor of the transaction.
The underlying funds will distribute cash as they generate income or exit investments, and will
make capital calls when they require additional cash to invest. Cash flows generated by the funds
will be used to pay off the notes, as well as pay interest and expenses.
Key Rating Drivers
NAV Overcollateralization: The rated notes will make up approximately 70% of the NAV at
issuance, providing a sufficient level of credit enhancement (CE) at the indicated rating levels, per
Fitch’s rating criteria. The 50% of CE for class A and 30% of CE for class B provide the notes with a
cushion in case PE distributions are realized at lower levels than expected. The rating of the class B
notes reflects its subordination and the lower level of CE available to this class.
Structural Features: Key structural features include a liquidity loan facility to fund capital calls,
interest payments and other expenses in the event of a cash shortfall; amortization triggers tied
to loan to value (LTV) levels; and long final maturities of the notes to support the structure’s
ability to weather a down market.
Diversified Portfolio: Nassau CFO’s portfolio of PE interests is diversified by strategy,
vintage, managers, funds, underlying holdings and sectors. The portfolio comprises 109 funds
managed by 69 fund managers, with 1,273 underlying investments. The high portfolio
diversification is counterbalanced by a focus on funds run by smaller and mid-sized managers,
and a higher allocation to third- and fourth-quartile funds relative to other PE CFO portfolios.
Cash Flow Analysis: Fitch measured the ability of the structure to withstand weak performance
in its underlying funds in combination with adverse market cycles. Class A notes are expected to
be rated ‘Asf’, and class B notes are expected to be rated ‘BBsf’, reflecting their ability to
withstand fourth-quartile- and third-quartile-level performance, respectively, in the underlying
funds under Fitch’s scenario analysis.
Inside This Report Page Transaction Overview 1 Key Rating Drivers 1 Structure Overview 2 Portfolio Overview 3 Structural Features 6 Cash Flow Scenario Analysis 11 Valuations 16 The Manager 17 Alignment of Interests 18 Security and
Bankruptcy Remoteness 18 The Model 18 Surveillance of the Transaction 19 Rating Sensitivities 19 Appendix: Terms of the Notes 20
Related Criteria
Closed-End Funds and Market Value Structures Rating Criteria (June 2019)
Structured Finance and Covered Bonds Counterparty Rating Criteria (April 2019)
Global Structured Finance Rating Criteria (May 2019)
Analysts
Funds and Asset Managers Greg Fayvilevich +1 212 908-9151 [email protected]
Igor Gorovits, CFA +1 646 582-4662 [email protected]
Domenic Bussanich +1 646 582-4874 [email protected]
Alexandra Kelly +1 646 582-4814 [email protected]
Brian Jarmakowicz +1 646 582-4586 [email protected]
Ari Luss +1 646 582-3565 [email protected]
Structured Finance Helen Anagnostos +1 212 908-0876 [email protected]
Capital Structure
Class Expected Rating
Amount ($ Mil.)
Interest Rate (%)
Maturity Approximate
% of NAV Approximate NAV OC (%)
Liquidity Loan Facility A+(EXP)sf N.A.a 3mL + 2.25 August 2034 N.A. N.A.
a
A A(EXP)sf 187.8 TBD August 2034 50 50
B BB(EXP)sf 75.2 TBD August 2034 20 30
Equity N.A. 112.7 Residual N.A. N.A. N.A.
aLiquidity loan facility is not drawn at launch but has an initial commitment of $30 million that steps down over time.
N.A. – Not applicable at launch. 3mL – Three-month LIBOR. TBD – to be determined. Expected ratings do not reflect final ratings and are based on information provided by the issuer as of Aug. 8, 2019. These expected ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy, sell or hold any security. The offering circular and other materials should be reviewed prior to any purchase.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 2
August 9, 2019
Counterparty Exposure: Certain structural features of the transaction involve reliance on
counterparties, such as the liquidity lender and account banks. The ratings of the notes could
be negatively affected in the event that key counterparties fail to perform their duties. Fitch
believes this risk is mitigated by counterparty rating requirements and replacement provisions
in the transaction documents that align with Fitch’s criteria.
Capabilities of the Manager: Fitch believes the manager (NAI) has the capabilities and
resources required to manage this transaction. NAI’s management team has extensive
experience in the PE industry, although the team is comparably smaller than for other Fitch-
rated PE CFOs.
Alignment of Interests: The sponsor and noteholders’ interests are sufficiently aligned, as the
sponsor and its affiliates are expected to hold at least a majority of the equity stake
(approximately 15%30% of NAV) in Nassau CFO, and absorb any losses before noteholders.
However, the degree of alignment of interest is lower than for other PE CFOs where sponsors
retained a greater portion of the transaction through the equity and/or debt tranches.
Asset Isolation and Legal Structure: Fitch expects that the issuer will be structured as a
special-purpose, bankruptcy-remote entity, the issuer will have 100% member interests in
Nassau 2019 CFO Fund LLC (AssetCo) and the assets held by AssetCo will have been
transferred to it as a true sale. Fitch has not yet received legal opinions on the transaction, but
expects the opinions to address true sale, non-consolidation and other items customary for
similar transactions.
Rating Cap at ‘Asf’ Category: Fitch has a rating cap at the ‘Asf’ category for PE CFO
transactions, primarily driven by the uncertain nature of PE fund cash flows. An additional
rating cap at the ‘Asf’ category applies to class B notes as their interest payment is deferrable.
Structure Overview
Nassau CFO is expected to be structured as a special-purpose entity that will be the sole
equityholder of AssetCo. The issuer’s capitalization will include class A and B notes, as well as
an equity tranche. The net cash received by the issuer via the issuance of the notes will be
used by the issuer to purchase 100% shareholding interest in AssetCo from the sponsor and
pay certain fees and expenses incurred in connection with the issuance and acquisition of the
fund investments.
AssetCo will hold the fund investments as the limited partner (LP) for each of the underlying
interests, except as described below with respect to investments held in “side vehicles”.
AssetCo will transfer cash distributions received from the fund investments to the issuer, which
will apply the distributions quarterly in accordance with the priority of payments.
Related Research
PE CFOs Gain Traction (February 2019)
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 3
August 9, 2019
Portfolio Overview
The portfolio is diversified across strategies, vintages, managers, funds, and underlying
holdings and sectors. The funds were acquired over time, largely through primary fund
commitments, by Nassau Life Insurance Company (NNY) and its affiliates for their general
investment account to support the insurance business.
The portfolio is expected to be largely static. Reinvestments in new funds are not permitted
after the transaction closes. Selling fund interests is allowed, as described below, but is not
expected under normal circumstances.
The funds are mature, with a weighted average (WA) vintage of 2013 and $79.3 million of remaining
unfunded capital commitments, which is approximately 11% of total commitments, or 21% of NAV.
Due to the maturity of the portfolio, it is now cash flow positive, with 2018 distributions at $112 million
and capital calls at $46 million. Nassau CFO has a higher balance of debt funds than previous PE
CFOs rated by Fitch recently, which may provide more steady cash flows relative to buyout funds.
This may therefore reduce the need to draw on contingent liquidity available to the PE CFO in a
downturn scenario. The net IRR for the portfolio as a whole from inception through 2018 is
approximately 10%, according to Fitch’s calculations based on actual fund cash flow data provided
by the sponsor (this measure is an estimate using annual cash flows).
The portfolio consists primarily of U.S. funds run by smaller and mid-sized managers, with
average fund sizes for the buyout, mezzanine/debt and venture strategies at $688 million, $375
million and $300 million, respectively. Fitch reviewed each fund and manager in the portfolio
quantitatively and qualitatively, including reviewing the manager’s history, size, capital-raising
success, and previous fund performance based on information available publicly, from third-
party data providers and from the sponsor. Based on this review, Fitch applied additional
stresses to certain funds beyond the base case scenario analysis, as described further below.
Top 10 General Partners
(As of June 30, 2019) (% of Total Exposure)
Intermediate Capital Group 4.6
Stage 1 Ventures 3.9
GoldPoint Partners 3.8
Northstar Capital 3.8
Gridiron Capital 3.4
Fund Manager A 3.3
AEA Investors 3.1
Edison Partners 2.9
Fund Manager B 2.7
PineBridge Investments 2.7
Source: Nassau 2019 CFO LLC.
Nassau 2019 CFO LLC: Post-Closing Structure
aAlso, potentially non-affiliated investors.
Source: Nassau 2019 CFO.
Affiliates of Nassau
Financial Groupa
Fund Interests
Nassau 2019 CFO LLC
(Issuer)
Nassau 2019 CFO Fund LLC
(AssetCo)
Nassau Alternative
Investments LLC
(Investment Manager)
Barclays Bank plc
(Liquidity Lender)
Barclays Capital Inc. and
Sandler O'Neill &
Partners, L.P.
(Initial Purchasers) Collateralized
Fund Obligation
Investment Management
Agreement
$$$
U.S. Bank, National
Association
(Trustee)
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 4
August 9, 2019
The portfolio is fairly balanced in terms of quartiles, skewing slightly toward the bottom two at 54%,
as shown in the chart above. Of the 17% of NAV in the fourth quartile, 11% is associated with a net
IRR higher than 6% and only 4% represents a negative net IRR. Of the fourth-quartile NAV, 4% is
associated with 2015 or 2016 vintages, where quartile rankings may still evolve given the young age
of these funds, whose net multiples range from 1.02x1.08x.
Approximately 59% of funds by NAV have net IRRs greater than 10%, with a majority of buyout
funds returning more than 15% and mezzanine funds clustered in the 5%10% bucket. On a WA
basis, the buyout funds in the portfolio have net IRRs and net multiples of 17.7% and 1.53x, debt
and mezzanine funds are at 10.4% and 1.28x, and venture funds are at 13.0% and 1.52x,
respectively.
Fitch has identified 6.6% of NAV associated with funds that have either exhibited weak performance,
where the general partner’s (GP) prior funds have exhibited weak performance, and/or where the
GP’s resources appear to be limited or it has not raised additional capital in recent years. As
described further below, Fitch ran additional stresses where it did not afford these funds credit in its
modelling.
The portfolio has 26 funds, approximately 10% of NAV, that are older than 11 years at transaction
launch, and about 2% of NAV is in 2005 and earlier vintages. Funds that are near the end of their
lives may have fewer holdings in their portfolios, and their distributions may be less certain. Across
the cash flow scenarios Fitch ran, these tail-end funds on average contribute 3% of the total
distributions.
Two investments in the portfolio are “side vehicles” where NNY owned the underlying holdings
directly. NNY made commitments to Kayne Anderson and ICG Fund Advisors to invest directly in
loan participations, warrants and equity alongside these managers’ respective mezzanine debt
funds. All underlying holdings in the side vehicles are identical to those in the actual funds and
represent similar exposures to investments in the actual funds. Side vehicles are common in PE
and are generally structured to provide the investor more favorable terms than those available to
investors in the equivalent funds. The investments owned by each side vehicle were transferred
into AssetCo via participation agreements. As the investment strategy and cash flow profiles of
these side vehicles are expected to follow the equivalent funds, Fitch applied its normal cash flow
projections to each vehicle as a debt mezzanine fund.
The Nassau CFO portfolio is the most diversified Fitch has rated, with 1,273 underlying portfolio
company holdings. The top holdings make up 1.1%, 0.7% and 0.7% of NAV. The highest
concentration to an underlying sector is in software and services, at 20% of NAV, as shown on the
table on the left.
Underlying Investment Sector Breakdown
(As of March 31, 2019)
(% of NAV)
Software and Services 20
Commercial and Professional Services 15
Capital Goods 14
Healthcare Equipment and Services 9
Energy 5
Technology Hardware and Equipment 4
Pharmaceuticals, Biotechnology and Life Sciences 4
Materials 4
Consumer Services 4
Automobiles and Components 4
Remaining 12 Sectors 18
Source: Nassau 2019 CFO LLC.
First Quartile
33%
Second Quartile
13%
Third Quartile
37%
Fourth Quartile
17%
aData as of Dec. 31, 2018, depending on availability.Source: Nassau 2019 CFO.
Portfolio NAV by Quartile(As of March 31, 2019a)
0%–5% IRR8%
Portfolio NAV by Net IRR (As of March 31, 2019a)
10%–15% IRR24%
Greater than 15% IRR
35%
Negative IRR4%
5%–10% IRR29%
aData as of Dec. 31, 2018, depending on availability.Source: Nassau 2019 CFO.
Less than 0.5x0%
0.5–1.0x2%
1.0x–1.5x64%
1.5x–2.0x24%
Greater than 2.0x10%
Portfolio NAV by Net Multiple
(As of March 31, 2019a)
aData as of Dec. 31, 2018, depending on availability.Source: Nassau 2019 CFO.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 5
August 9, 2019
Nassau 2019 CFO Portfolio (As of June 30, 2019)
No. Funds Vintage Geography Strategy Commitment
($ Mil.) NAV
($ Mil.) % of NAV
Undrawn Capital
Commitments ($ Mil.)
Total Exposure
($ Mil.) % of Total Exposure
1 ICG Fund Advisors LLC 2014 U.S. Mezzanine 20.0 20.0 5.3 0.8 20.8 4.6
2 Stage 1 Ventures Seed LLC 2014 U.S. Venture Capital 15.0 15.1 4.0 2.8 17.9 3.9
3 New Canaan Funding Mezzanine VI 2015 U.S. Mezzanine 12.0 5.3 1.4 4.8 10.1 2.2
4 Windjammer Senior Equity Fund IV 2012 U.S. Buyout 7.5 8.7 2.3 1.4 10.1 2.2
5 Fund A 2015 U.S. Mezzanine 10.0 5.8 1.5 3.9 9.7 2.1
6 Gridiron Capital Fund III 2015 U.S. Buyout 6.0 6.7 1.8 2.8 9.5 2.1
7 Maranon Mezzanine II 2015 U.S. Mezzanine 10.0 5.7 1.5 3.5 9.3 2.0
8 Northstar Mezz Partners VI 2013 U.S. Mezzanine 10.0 7.7 2.0 1.6 9.3 2.0
9 GoldPoint Mezz Partners IV 2015 U.S. Mezzanine 8.0 6.8 1.8 2.3 9.1 2.0
10 Fund B 2015 U.S. Venture Capital 5.0 8.3 2.2 0.7 9.0 2.0
11 PineBridge Structured Capital Partners III 2016 U.S. Mezzanine 10.0 5.2 1.4 3.6 8.8 1.9
12 Fund C 2007 U.S. Venture Capital 9.0 8.6 2.3 0.0 8.7 1.9
13 Aurora Equity Partners V 2016 U.S. Buyout 8.0 4.5 1.2 3.8 8.3 1.8
14 Peninsula Fund VI 2016 U.S. Mezzanine 8.0 6.2 1.7 2.1 8.3 1.8
15 New Harbor Capital Fund 2015 U.S. Buyout 5.0 7.8 2.1 0.4 8.3 1.8
16 Northstar Mezz Partners V 2007 U.S. Mezzanine 17.5 6.5 1.7 1.5 8.0 1.8
17 Pinnacle IV 2015 U.S. Mezzanine 8.0 7.9 2.1 0.0 7.9 1.7
18 Freeport First Lien Loan Fund III 2015 U.S. Debt 8.0 6.4 1.7 1.2 7.7 1.7
19 NB Strategic Co-Investment Partners III 2016 U.S. Buyout 6.0 5.4 1.4 1.7 7.1 1.6
20 Edison Venture Fund VIII 2015 U.S. Buyout 5.0 6.6 1.8 0.1 6.7 1.5
21 Yukon Partners II 2013 U.S. Mezzanine 8.0 4.9 1.3 1.4 6.2 1.4
22 GCG Investors III 2013 U.S. Mezzanine 11.0 4.7 1.2 1.1 5.8 1.3
23 Trinity Hunt Partners IV 2013 U.S. Buyout 4.5 4.8 1.3 0.9 5.7 1.3
24 TA XII-A 2016 U.S. Buyout 5.0 5.3 1.4 0.4 5.7 1.3
25 Fund D 2014 U.S. Venture Capital 3.0 5.3 1.4 0.3 5.6 1.2
26 AEA Investors Small Business Fund III
2016 U.S. Buyout 5.0 4.0 1.1 1.5 5.5 1.2
27 Fund E 2016 U.S. Buyout 5.0 5.2 1.4 0.3 5.4 1.2
28 Riverside Micro-Cap Fund III 2014 U.S. Buyout 2.8 5.0 1.3 0.4 5.4 1.2
29 Graycliff Mezzanine II Parallel 2014 U.S. Mezzanine 7.0 3.8 1.0 1.6 5.4 1.2
30 Banc Fund IX 2014 U.S. Buyout 5.0 5.4 1.4 0.0 5.4 1.2
31–109 Other Various Various Various 496.8 172.3 45.8 32.4 204.7 45.0
Total — Nassau 2019 CFO Portfolio — — — 741.0 375.7 100.0 79.3 455.0 100.0
Source: Nassau 2019 CFO.
Portfolio Stratification (% of Total Exposure)
3 Years Old 4 Years Old 5 Years Old 6 Years Old 7 Years Old 8 Years Old 9 Years Old 10 Years Old 11 Years Old > 11 Years
Fund Strategy and Age
(2016 Vintage)
(2015 Vintage)
(2014 Vintage)
(2013 Vintage)
(2012 Vintage)
(2011 Vintage)
(2010 Vintage)
(2009 Vintage)
(2008 Vintage) Old Various Total
Buyout 8 10 4 4 7 3 3 0 1 2 43
Mezzanine 4 10 8 8 2 4 0 0 1 5 41
Venture Capital 0 2 5 1 1 1 0 0 0 3 14
Debt 0 2 0 1 0 0 0 0 0 0 2
Total 12 23 17 13 10 8 3 1 3 10 100
Source: Fitch Ratings.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 6
August 9, 2019
Structural Features
Given the uncertain nature of PE fund distributions and the reliance on market valuations, the
transaction includes structural protections to help the rated notes potentially weather negative
market cycles and depressed valuations when PE distributions may be low. Class A and B
notes are scheduled to begin amortizing approximately two years and nine months after the
transaction closes, as described in the section below, but the notes feature a long legal
maturity of 15 years, which could be supportive in weathering a potential market downturn.
Fitch’s ratings address the timely repayment of the notes at their legal final maturities. The
structure also has a liquidity loan facility to cover operating expenses, interest on class A notes
and capital calls if cash flow is insufficient. These features help mitigate the cyclicality of PE
funds that Fitch considered in its analysis.
Transaction Comparison — At Launch
Nassau 2019 Pte. Ltd Astrea V Pte. Ltd. SWC Funding LLC Astrea IV Pte. Ltd. Astrea III Pte. Ltd.
Sponsor Nassau Azalea/Temasek Sightway/Two Sigma Azalea/Temasek Azalea/Temasek
Closing Date Expected August 2019 6/20/19 8/3/18 6/14/18 7/8/16
Issuance ($ Mil.)
Total Debt Issuance 263 600 216 501 510
Note Maturities (Years)
Legal Final Maturity 15 10 15 10 10
Capital Structure (% of NAV)
Asf 50 35 50 36 30
BBBsf 0 10 — 10 9
BBsf 20 N.A. N.A. N.A. N.A.
Non-Investment Grade or Unrated Debt
0 N.A. N.A. N.A. 6
Equity 30 55 50 54 55
Portfolio
Collateral NAV ($ Mil.) 375.7 1,324.4 432.4 1,098.4 1,141.6
Unfunded (as % of NAV) 21 16 19 15 18
Total Exposure ($ Mil.) 455.0 1,539.4 516.1 1,266.5 1,343.0
No. of Funds 109 38 32 36 34
No. of Managers 69 32 19 27 26
No. of Co-Investments N.A. N.A. 7 N.A. N.A.
No. of Portfolio Holdings 1273 862 244 596 592
WA Fund Age (in Years) 6 5 5 7 7
Allowed to Sell Investments Yes (35%) Yes (15%) Yes (35%) Yes (10%) No
Largest Fund Strategy Exposure with % of NAV
Buyout (43%) Buyout (81%)
Real Asset — Natural Resources — Excluding Oil
& Gas (51%) Buyout (86%) Buyout (77%)
Second Largest Fund Strategy Exposure with % of NAV Mezzanine (41%) Growth Equity (19%)
Real Asset — Natural Resources — Oil & Gas
(22%) Growth Equity (12%) Growth Equity (23%)
Third Largest Fund Strategy Exposure with % of NAV Venture Capital (14%) — Venture Capital (11%) Private Debt (2%) —
Contingent Liquidity Liquidity facility is available to
cover expenses, interest and capital calls. The facility is
sized to 1 year's interest and expenses plus 25% of
unfunded. Initial size is $30 million Also option to require sponsor to cover capital calls.
Liquidity facility to cover expenses, interest and
capital calls. Facility is sized in two parts: (A) starts at $130 million and steps
down and (B) is sized to 50% of unfunded. Initial size
is $238 million.
Liquidity facility is available to cover expenses, interest and
capital calls. The facility is sized to 1 year's class A
interest plus 50% of unfunded. Initial size is $50
million. Also option to require sponsor to cover capital calls.
Two separate facilities: Capital call facility sized to cover the entire unfunded amount of the portfolio. Liquidity facility to cover interest and expenses,
initially sized at $100 million.
Prefunded reserve account to cover the entire unfunded
amount of the portolio. Liquidity facility to cover interests and expenses,
initially sized at $90 million.
N.A. – Not applicable. Source: Fitch Ratings, transaction documents.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 7
August 9, 2019
LTV Ratios
The priority of payments provides for de-leveraging of the issuer on any distribution date when the
LTV ratios are breached, subject to available funds in the structure. The purpose of this feature is to
protect noteholders against declines in NAV that would render the remaining NAV insufficient to
provide future distributions to support the notes. This could happen because of market-wide or fund-
specific stress that causes valuations to decline, or due to distributions, which also reduce the NAV.
There is no requirement to sell fund interests upon a breach of the LTV ratios.
LTV is calculated as the outstanding balance of the liquidity loan facility, the preferred equity, and
the notes divided by the portfolio NAV and the cash collateral account balance. If LTV exceeds the
50% threshold for class A notes, or the 70% threshold for class B notes, 100% of the remaining
cash flow after payment of amounts due under prior clauses of the priority of payments will be paid
in accordance with clauses 7 and 9. Available cash will be applied to the principal repayment of
class A notes until the LTV ratio is no longer in breach of 50%, and then to class B notes until the
LTV ratio is no longer in breach of 70%.
Class B Deferred Interest
The class B note interest will be paid on distribution dates in accordance with clause 8 of the
priority of payments. However, the class A LTV must be 50% or lower before this payment can
be made, in accordance with clause 7 of the priority of payments. If available cash is
insufficient to pay the class B interest, the shortfall will be deferred by adding the shortfall
amount to the principal balance of class B notes. Fitch’s rating on the class B note addresses
timely payment of principal and ultimate payment of interest.
Cash Collateral Account
Prior to the controlled amortization period, the transaction manager may direct the trustee to deposit
cash in the cash collateral account if after satisfying clauses 1 to 5 of the priority of payments, the
LTV ratio for class A and B notes is not higher than 50% and 70%, respectively. Cash can build up
in the cash collateral account up to 100% of the unfunded capital commitments, and, in practice,
cash will accumulate if the NAV appreciates and the manager chooses to use distributions to pre-
fund capital calls rather than let the equityholder receive excess distributions. This cash would be
available to fund capital calls and to de-lever the transaction if the LTV ratios are breached, as
described above. Since the deposit into the cash collateral account is optional, in its modeling, Fitch
assumed that cash is not deposited into the account.
Controlled Amortization Period
The controlled amortization period begins in August 2022 (approximately three years after the
transaction’s close), unless the clean-up amortization is triggered earlier. During the controlled
amortization period, the notes will be paid pro rata from available funds in accordance with clauses
10 and 11 of the priority of payments, 50% to class A and 20% to class B. Fitch views positively the
nature of the controlled amortization, which allows the noteholders to benefit alongside the
equityholders if the portfolio produces strong cash flows.
Clean Up Amortization Period
The clean-up amortization period is expected to commence in February 2025 (approximately
five years and six months after the transaction’s close), whereby available funds will be
directed to the principal payment of class A and B notes, sequentially, until paid in full in
accordance with clauses 12 and 13.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 8
August 9, 2019
However, the clean-up amortization period can go into effect earlier, on the first to occur of (i) a draw
on the liquidity facility to cover a capital call, which is then not repaid within 90 days; (ii) AssetCo fails
to satisfy a fund investment capital call; (iii) less than 20% of the initial principal of the notes is
outstanding; or (iv) acceleration of the notes following an event of default.
Fitch views positively the nature of the amortization period, whereby a significant portion of
cash flows generated by the portfolio will go toward paying down the notes in the early years of
the transaction.
Optional Redemption
During the controlled amortization period, the issuer has the option to partially or fully repay
principal pro rata to class A and B notes from available funds in accordance with clause 14 of
the priority of payments. In addition, the majority holder of the equity may elect for an optional
redemption of the notes in full at any time. Optional redemptions are subject to redemption
premiums, as described in the table at the left. Payments under the controlled and clean-up
amortization provisions discussed above are not subject to prepayment premiums.
Liquidity Loan Facility
A liquidity loan facility will be established, initially with Barclays Bank plc (rated A+/F1 by Fitch),
to fund certain key payments in case of a shortfall in distributions.
Facility Availability and Utilization
The liquidity facility can be used to pay expenses and class A interest (clauses 1 through 4 of the
priority of payments, excluding 3(ii) [preferred equity interest]), as well as capital calls in the event
that available cash is not sufficient to cover these payments. Draws on the liquidity facility to cover
capital calls can be made only to the extent that, subsequently, there is remaining availability under
the facility to cover six months’ interest on the class A notes.
The amount available under the liquidity facility will be $30 million from transaction launch through
May 2022, and, thereafter, the facility size may remain the same or step down, at the discretion of
the manager and the issuer. However, the amount available to borrow under the facility may not be
less than the sum of (x) 25% of remaining unfunded capital commitments plus (y) one year’s
estimated costs of funding clauses (1) through (4) of the priority of payments (excluding interest on
preferred interests, clause 3(ii)). The liquidity loan facility terminates if the notes are fully redeemed
or the notes or the liquidity facility are accelerated.
The relative amount of liquidity available under the liquidity facility for the transaction is lower
than that of previous PE CFOs that Fitch rated. There is a risk that, in the event of a prolonged
drought period where the underlying funds do not distribute sufficient cash to the structure, the
issuer may not be able to cover ongoing expenses or capital calls. Similarly, if the underlying
funds make higher capital calls than expected during a short period, the structure may not be
able to cover them.
These risks are mitigated by the relative maturity of the funds in the portfolio, which means they
generally distribute more cash than they call capital. A greater portion of the unfunded capital
commitments in the portfolio is associated with older funds, relative to other PE CFOs, and these
funds may call less of their stated remaining unfunded commitments. Additionally, a large portion of
the portfolio comprises mezzanine funds that are expected to generate relatively stable income and
are not as reliant on the capital markets to realize cash through sales of holdings. The modeling
scenarios Fitch ran show there was sufficient cushion between cash generated and liquidity facility
availability on the one hand, and the expenses, interest and capital calls on the other hand. In most
Prepayment Premium Period Percentage
From launch to November 2020 4
From November 2020 to November 2021 3
From November 2021 to November 2022 2
From November 2022 until clean-up amortization begins or the outstanding balance of the notes is less than 20% of the initial balance 1
When clean-up amortization begins or less than 20% of the notes’ balance is outstanding 0
Source: Nassau 2019 CFO.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 9
August 9, 2019
of Fitch’s modeling scenarios, the liquidity facility was not utilized since there were sufficient
distributions to cover the ongoing cash outlays of the transaction.
Interest and Repayment
Interest on the amount drawn is paid at the rate of London Interbank Offering Rate (LIBOR)
plus 2.25% unless a LIBOR disruption event is in effect. There is an annual 1.00% commitment
fee on the undrawn portion.
The liquidity loan balances may be repaid on any business day and may be re-borrowed by the
issuer. Available funds on any distribution date will be used to pay down the liquidity facility in
accordance of clause 5(i) of the priority of payments. Any loan amount outstanding after this
payment may be repaid on any subsequent business day but is also repayable on the next
distribution date if there are sufficient available funds.
The liquidity facility provider can cancel the commitment or declare the outstanding amount due
and payable if there is an event of default under the liquidity loan facility agreement. Such
events include non-payment of liquidity loan interest or commitment fee when due, any event of
default under the notes and a sale by the sponsor of its equity interest in Nassau CFO without
satisfying certain conditions, among others. The clean-up amortization period will be triggered if
any liquidity loan issued to cover a capital call is not repaid in full for 90 consecutive days.
Liquidity Facility Replacement
The liquidity loan facility provider is required by the transaction documents to have a long-term rating
of at least ‘BBB’ or a short-term rating of at least ‘F2’. In the event that the liquidity loan facility
provider’s ratings fall below these thresholds, the documents require that the provider, at its own
expense, will either deliver a financial guaranty insurance policy or letter of credit that satisfies the
rating criteria or find a replacement provider that satisfies the rating criteria. The time allowed for
replacement by the documents is 30 days. These terms are in line with Fitch’s structured finance
counterparty criteria for the stated note ratings. If in the future the liquidity facility provider is
downgraded below the ratings specified above and is not replaced as stated in the documentation,
and the liquidity facility is determined at that time to be material to the transaction, the rating of the
notes outstanding at that time could be downgraded to be in line with the rating of the liquidity facility
provider at that time.
Funding of Future Capital Calls
AssetCo is the limited partner in the portfolio’s funds and will be required to satisfy all capital
calls made by the funds. However, as AssetCo will not retain any cash in its accounts, it will
rely on resources available to the issuer to meet its capital calls obligations. The issuer may
use cash available in certain of its accounts (payment, issuer, cash collateral and fund
investment contribution accounts) to fund the AssetCo capital call. Cash can be withdrawn from
the accounts for this purpose only if after the withdrawal there remains enough cash (plus any
distributions expected to be received by the next distribution date) to make payments under
clauses 1 through 4 of the priority of payments on the next distribution date.
If cash available in the accounts is not sufficient to satisfy AssetCo’s capital call, then the issuer
may request an advance under the liquidity loan facility.
Alternatively, the issuer may require NNY to make a preferred capital contribution to the issuer
to satisfy AssetCo’s capital call. If the issuer requests that NNY make the preferred capital
contribution, NNY is contractually obligated to make the contribution. However, since the issuer
and the manager are controlled by NNY and its affiliates, Fitch expects that such a request to
make a preferred capital contribution will only happen with NNY’s consent.
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Nassau 2019 CFO LLC 10
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NNY has a long track record of meeting capital calls made to its portfolio of PE funds, and
currently has access to significant liquidity relative to the capital call obligations it may receive.
Liquidity at NNY is available through its portfolio of liquid securities, as well as through liquidity
facilities available to NNY and its affiliates.
Preferred Equity
As noted above, NNY may contribute capital to the issuer to satisfy an AssetCo capital call.
NNY may also voluntarily contribute capital to the issuer at any time, to be deposited into the
cash collateral account or fund investment contribution account. Once NNY contributes capital,
it will receive preferred limited liability company interests in Nassau CFO, with a notional value
equal to the amount contributed.
The preferred equity will receive a rate of return equal to the interest on the liquidity facility
(payable in accordance with clause 3(ii) of the priority of payments). The preferred equity will
be amortized using available cash in accordance with clause 5(ii) of the priority of payments,
and from that perspective, it is senior to class A notes.
In modeling stress scenarios, Fitch assumed that no capital contributions from NNY materialize.
The potential voluntary capital contributions are not contractual, and the capital call
contributions are likely to only happen with NNY’s consent as noted above. In addition, NNY’s
credit quality is not sufficiently high relative to the ratings of the Nassau CFO notes for NNY to
be relied upon as a counterparty under Fitch’s criteria. However, Fitch views the ability of NNY
to contribute capital positively, particularly given its long track record managing the underlying
PE funds, as well as its position as the majority equity owner (together with its affiliates) of
Nassau CFO.
Fund Dispositions
Nassau has the ability to sell stakes in the underlying PE fund interests at the manager’s
discretion, with certain restrictions. Nassau CFO may sell investments of up to 35% in
aggregate of the portfolio NAV.
Sales of investments can be made to unaffiliated third parties for not less than market value, or
to an affiliate of the issuer or sponsor, for the higher of NAV (adjusted for capital calls and
distributions) and fair market value. Sales to affiliates present clear potential for a conflict of
interests, although Fitch views the floor set on the sale price as a mitigant, and the incentives
for unethical transactions are limited since the sponsor owns the majority of the equity in the
structure and will absorb any losses before noteholders. The issuer may also appoint a
conflicts advisory board to supervise these sales, but Fitch has not relied on it in its analysis
given the optionality of appointing the board.
At each distribution date, net cash proceeds received from a fund disposition will be distributed
in accordance with the priority of payments. The portion of fund disposition proceeds remaining
after payment of clauses (1) to (5)(ii) will be used to pay down the principal of class A notes.
Prepayments of class A notes with fund disposition proceeds in excess of 10% of the initial
portfolio NAV will be subject to a prepayment premium. Fitch views the disposal option as a
positive, as it may allow the manager to realize some of the outstanding NAV if organic
distributions from that NAV come in lower or slower than needed to pay Nassau CFO’s
liabilities. In particular, Fitch views positively that fund disposition proceeds will be used to pay
down the class A principal after certain expenses and interest are paid. Selling fund interests
on the secondary market in a stressed environment will likely require a steep discount, and in
its modeling, Fitch assumed that the fund disposition option was not used.
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Account Banks and Eligible Investments
Cash or investments held in various accounts within the structure are subject to certain requirements.
Any account banks and any investments must have a short-term rating of at least ‘F2’ by Fitch or a
long-term rating of at least ‘BBB’ by Fitch, at time of investment. Investments must mature before the
earlier of 30 days or the next distribution date. Eligible investments include U.S. government and
agency debt, bank deposits, repurchase agreements collateralized by U.S. government and agency
debt with a counterparty that meets the minimum ratings described above, corporate debt, commercial
paper and money market funds rated ‘AAAmmf’ by Fitch. Account banks that fall below the rating
requirements described above must be replaced within 60 calendar days.
The bank account and investment guidelines meet Fitch’s criteria for qualified investments, and,
therefore, the rating of the notes is not linked to the ratings of the transaction’s bank accounts or
investments. However, if any of the account bank providers are downgraded below the ratings
specified above and are not replaced as stated in the documentation, and the account is determined
at that time to be material to the transaction, the rating of the notes may be downgraded.
Cash Flow Scenario Analysis
As described in Fitch’s criteria, when rating PE CFOs, the structure’s projected performance and
distributions over different market cycles are reviewed to assess whether cash flows are sufficient to
pay off the rated obligations based on the transaction’s structural features.
The performance scenarios for Nassau CFO were constructed based on historical data that matched
the characteristics of Nassau CFO’s portfolio, primarily the types of funds (buyout, mezzanine, debt
and venture capital) and the ages of the funds. For example, about 5% of the portfolio’s exposure
comprises buyout funds that are to be approximately five-year-old funds as of the expected launch of
Nassau CFO in 2019. As a result, Fitch reviewed how five-year-old buyout funds performed over
Transaction Accounts Overview Account Name Owner Account Description
Collection Account AssetCo This account will receive any cash distributions from the funds in the structure. Cash from this account will be swept to the payment account on a daily basis. The notes will have a claim on this account through the AssetCo guarantee.
Custodial Account AssetCo This account will receive any in-kind distributions from the funds in the structure. Cash from this account will be swept to the payment account on a daily basis. The notes will have a claim on this account through the AssetCo guarantee.
Payment Account Issuer Cash will be swept here on a daily basis from the collection account and custodial account. Any proceeds from fund dispositions will also be deposited into this account. Proceeds in this account will be applied to the priority of payments at each distribution date. Funds in this account may be used to satisfy a capital call on the structure. The notes will have a claim on this account.
Cash Collateral Account Issuer The issuer has discretion to direct funds to this account prior to the class A note controlled amortization period of the transaction with the primary objective of funding future capital calls. The maximum amount that is allowed to be held in the account will be the aggregate amount of unfunded capital commitments. As capital commitments are made, any excess funds above the remaining unfunded amount will be released to the payment account. Money in this account can also be used to de-lever the structure upon a LTV breach. The notes will have a claim on this account.
Fund Investment Contribution Account
Issuer This account will hold additional funds that NNY injects into the structure to meet a capital call in relation to its guarantee to fund capital calls in the event of a shortfall in the structure. Proceeds will be used to fund capital calls only. The notes will have a claim on this account.
Capital Call Account AssetCo This account will receive funds from the issuer to fund capital calls on the structure. The notes will have a claim on this account through the AssetCo guarantee.
Issuer Account Issuer The manager will have discretion to deposit all or a portion of the remaining funds at the bottom of the waterfall into this account to fund future capital calls, future prepayments of the notes, prepayment of expenses or payments to the issuer for distribution to the equity. The notes will have a claim on this account.
Source: Fitch Ratings, Nassau 2019 CFO.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 12
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different economic cycles. These scenarios correspond to previous economic cycles observed over
15-year intervals to match the legal final maturity of the Nassau CFO rated notes.
For example, in one scenario, Fitch reviewed how a portfolio similar to Nassau CFO’s current profile
would have performed during the 15-year period between 2001 and 2016 (in the tables of the
results section referred to as the start-year 2001 scenario, labeled “2001”). The key data points in
the analysis are (1) how much capital the underlying funds called, (2) how much cash the underlying
funds distributed and (3) the NAV appreciation or depreciation that was driving distributions.
In addition, Fitch stressed the resilience of the structure to potential underperformance in
Nassau CFO’s underlying funds. For example, while the portfolio comprises relatively balanced
funds as measured by quartiles, in some of the scenarios Fitch ran, all the funds’ performance
was assumed to have deteriorated to fourth-quartile levels, which negatively affected their
projected distributions and other performance measures. In measuring the results of the
scenarios, Fitch focused on key metrics, such as the ability to make timely interest and
principal payments with respect to the legal final maturity of the rated notes, total cash flow as
a percentage of the transaction NAV, the repayment periods, the use of distributions in the
structure and how various structural protections drove performance of the transaction (LTV
triggers, liquidity loan facility and so on).
The various launch year scenarios Fitch ran are displayed in the tables below.
Results
The ‘Asf’ rating of class A notes reflects that, under all fourth-quartile performance projections Fitch
ran, class A notes made all timely interest and principal payments with respect to their legal final
maturity of 15 years. In all cases, class A notes were repaid by the final maturity date with the ratios
of distributed cash to the class A principal amount (and payments senior to it like expenses and
interest) varying between 1.3x and 1.7x in these scenarios. Class A notes were fully paid off in year
9.25 under the most punitive scenario.
The ‘BBsf’ rating of class B notes reflects that, under all third-quartile performance projections
Fitch ran, class B notes made all ultimate interest and timely principal payments with respect to
their legal maturity of 15 years. The principal payback period for class B notes varied between
approximately six and nine years. Cash flow coverage varied between 1.3x and 1.7x for class
B notes. Class B notes pass under Fitch’s third-quartile scenarios, implying a ‘BBBsf’ rating.
Launch Year Scenarios for Class A Notes — Fourth-Quartile Performance
Launch Year Scenario
Class A Notes
Payback Period
(Years)
Class A Cash Flow
to Principal Coverage
(x)
% of Collateral
NAV Remaining
After Payback
Class A WAL
Class A Max LTV
Gross Cash Flow (% of
Initial NAV)
Capital Calls Paid
(% of Initial NAV)
Expenses and Interest
Paid (% of Initial NAV)
Class A Note
Principal Paid (% of
Initial NAV)
Class B Note
Principal Paid (% of
Initial NAV)
Equity Distribution
s (% of Initial NAV)
2000 7.00 1.48 19 3.80 50 119 15 20 50 20 14
2001 7.50 1.38 14 3.86 54 114 16 21 50 20 7
2002 8.00 1.50 11 3.84 54 120 16 20 50 20 15
2003 8.75 1.63 12 4.27 50 134 17 22 50 20 25
2004 9.00 1.57 13 3.90 50 126 15 21 50 20 20
2005 9.25 1.52 18 4.36 52 130 15 25 50 20 19
2006 8.50 1.55 20 4.43 52 131 16 24 50 20 21
2007 8.00 1.39 21 4.33 56 119 16 24 50 20 9
2008 8.00 1.31 18 4.43 57 113 14 26 50 20 3
2009 8.50 1.50 14 4.77 50 125 12 25 50 20 18
2010 8.50 1.66 16 4.91 50 138 13 25 50 20 30
2011 8.50 1.56 14 4.70 50 130 14 25 50 20 22
2012 8.50 1.57 13 4.49 50 131 15 23 50 20 22
2013 7.75 1.64 16 4.15 50 132 15 21 50 20 25
Note: Equity distributions include performance incentive fee. Source: Fitch Ratings.
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However, Fitch’s criteria restrict investment-grade ratings to notes issued at LTV at or below
50%. Since class B notes are issued at a higher LTV, their rating is notched down to the
highest below-investment-grade category possible.
020406080100120140160
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(% of NAV)
2019 (LHS) 2020 (LHS) 2021 (LHS) 2022 (LHS) 2023 (LHS) 2024 (LHS) 2025 (LHS) 2026 (LHS)
2027 (LHS) 2028 (LHS) 2029 (LHS) 2030 (LHS) 2031 (LHS) 2032 (LHS) 2033 (LHS) Total (RHS)
Source: Fitch Ratings.
% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(Fourth Quartile)
(%)
Launch Year Scenarios — All Quartile Performance
Launch Year Scenario
Class A Notes Payback
Period (Years)
Class B Notes Payback
Period (Years) Class A
WAL Class B
WAL
Gross Cash Flow (% of
Initial NAV)
Capital Calls Paid (% of
Initial NAV)
Expenses and Interest Paid
(% of Initial NAV)
Class A Note Principal (% of
Initial NAV)
Class B Note Principal (% of
Initial NAV)
Equity Distributions (%
of Initial NAV)
2000 6.00 6.25 2.90 3.09 130 11 15 50 20 35
2001 6.25 6.50 3.24 3.85 135 13 17 50 20 35
2002 6.00 6.50 3.36 3.56 150 14 17 50 20 49
2003 6.50 7.25 3.54 3.72 181 14 18 50 20 79
2004 7.50 8.25 3.44 3.74 176 14 18 50 20 75
2005 7.25 8.00 3.72 4.32 177 13 19 50 20 75
2006 7.00 7.75 4.05 4.73 180 16 21 50 20 74
2007 7.00 7.50 3.80 4.58 155 14 20 50 20 51
2008 6.50 7.00 4.12 4.69 147 16 21 50 20 40
2009 6.50 7.00 4.63 4.95 186 17 25 50 20 75
2010 6.50 7.25 4.21 4.49 184 13 21 50 20 79
2011 6.75 7.50 3.98 4.27 174 15 20 50 20 70
2012 6.50 7.25 4.00 4.27 181 14 20 50 20 77
2013 6.50 7.00 3.97 4.22 180 15 20 50 20 75
Note: Equity distributions include performance incentive fee. Source: Fitch Ratings.
Launch Year Scenarios for Class B Notes — Third-Quartile Performance
Launch Year Scenario
Class B Notes
Payback Period
(Years)
Class B Cash Flow
to Principal Coverage
(x)
% of Collateral
NAV Remaining
After Payback
Class B WAL
Class B Max LTV
Gross Cash Flow (% of
Initial NAV)
Capital Calls Paid
(% of Initial NAV)
Expenses and Interest
Paid (% of Initial NAV)
Class A Note
Principal Paid (% of
Initial NAV)
Class B Note
Principal Paid (% of
Initial NAV)
Equity Distribution
s (% of Initial NAV)
2000 6.75 1.37 17 3.46 70 133 15 16 50 20 32
2001 6.75 1.34 17 3.56 74 130 14 16 50 20 30
2002 7.25 1.44 13 3.59 71 139 14 17 50 20 38
2003 8.00 1.63 14 4.12 70 160 15 19 50 20 56
2004 8.75 1.58 13 4.35 70 158 16 20 50 20 52
2005 8.00 1.61 18 4.50 73 161 16 20 50 20 55
2006 7.75 1.61 24 4.42 75 158 14 20 50 20 55
2007 7.25 1.50 25 4.40 77 150 16 19 50 20 45
2008 7.75 1.41 20 4.73 75 144 16 21 50 20 37
2009 7.25 1.64 27 4.86 70 167 16 22 50 20 59
2010 7.25 1.68 25 4.78 70 170 16 22 50 20 62
2011 7.50 1.59 21 4.50 70 159 15 21 50 20 54
2012 7.25 1.66 19 4.32 70 165 15 20 50 20 59
2013 7.00 1.69 21 4.18 70 165 14 19 50 20 62
Note: Equity distributions include performance incentive fee. Source: Fitch Ratings.
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In addition, the disposal option discussed above is an additional positive qualitative factor to
consider, which was not specifically modeled in the scenarios Fitch ran since it is at the discretion of
the manager. By exercising the disposal option, the manager may accelerate realization of the NAV
on the secondary market but likely at a steep discount in a stressed market.
The charts below show the progression of the LTV ratio over the life of the transaction in different
start year scenarios. The 2008 fourth-quartile launch year scenario experienced the highest LTV
levels, which was primarily driven by weak distributions and a steep decline in valuations from the
underlying funds in the first year. In year 1, the LTV ratio was breached, and from then on, available
cash was redirected to pay down the class A principal. In the following years, distributions and
valuations improved, which allowed the structure to cure the LTV ratio by year 3 and fully repay
class A notes by year 8.
Additional charts below show the projected annual progression of the transaction under the 2005
and 2008 launch year scenarios.
020406080100120140160180200
05
1015202530354045
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(% of NAV)
2019 (LHS) 2020 (LHS) 2021 (LHS) 2022 (LHS) 2023 (LHS) 2024 (LHS) 2025 (LHS) 2026 (LHS)
2027 (LHS) 2028 (LHS) 2029 (LHS) 2030 (LHS) 2031 (LHS) 2032 (LHS) 2033 (LHS) Total (RHS)
% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(All Quartiles)
Source: Fitch Ratings.
(%)
020406080100120140160180
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(% of NAV)
2019 (LHS) 2020 (LHS) 2021 (LHS) 2022 (LHS) 2023 (LHS) 2024 (LHS) 2025 (LHS) 2026 (LHS)
2027 (LHS) 2028 (LHS) 2029 (LHS) 2030 (LHS) 2031 (LHS) 2032 (LHS) 2033 (LHS) Total (RHS)
Source: Fitch Ratings.
% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(Third Quartile)
(%)
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0102030405060708090
2000 2001 2002 2003 2004 2005 2006
2007 2008 2009 2010 2011 2012 2013
Source: Fitch Ratings.
(%)
Class A LTV Progression in Stress Scenarios by Start Year Scenario(Fourth Quartile)
0102030405060708090
2000 2001 2002 2003 2004 2005 2006
2007 2008 2009 2010 2011 2012 2013
Source: Fitch Ratings.
(%)
Class B LTV Progression in Stress Scenarios by Start Year Scenario(Third Quartile)
0102030405060708090
020406080
100120140
(%)(Mil.)
Transaction Waterfall Progression
Capital Calls (LHS) Fees (LHS) Class A Interest (LHS)
Class A Principal (LHS) Class B Interest (LHS) Class B Principal (LHS)
Equity (LHS) Class A LTV (RHS) Class B LTV (RHS)
Source: Fitch Ratings.
2005 Transaction Launch Year — All Quartiles
- 10 20 30 40 50 60 70 80 90
020406080
100120140
(%)(Mil.)
Transaction Waterfall Progression
Capital Calls (LHS) Fees (LHS) Class A Interest (LHS)Class A Principal (LHS) Class B Interest (LHS) Class B Principal (LHS)Equity (LHS) Class A LTV (RHS) Class B LTV (RHS)
Source: Fitch Ratings.
2008 Transaction Launch Year — All Quartiles
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Fitch also ran various stress scenarios beyond the standard launch year scenario analysis
described above. As noted above, Fitch identified about 6.6% of funds by NAV that in one stress did
not receive any credit. In the 2008 launch year scenario under the fourth-quartile stress, this
reduced distributions as a percentage of NAV from 113% to 110%, and the payback period for the
A notes remained at 8 years. Under the same scenario using the third-quartile stress, distributions
as a percentage of NAV decreased from 144% to 138%, and the payback period for the B notes
remained at 7.75 years.
In another stress to test the sensitivity to the data being used, for vintages older than 2015
where there is thinner historical data in early launch year scenarios, Fitch replaced the
mezzanine historical data with data for a broad category of debt funds, which is more punitive
because more risky strategies like distressed debt and direct lending are included. In the 2008
launch year scenario under the fourth-quartile stress, this reduced distributions as a
percentage of NAV from 113% to 102%, and extended the payback period for the A notes from
eight years to nine years. Under the same scenario using the third-quartile stress, this reduced
distributions as a percentage of NAV from 144% to 138%, and extended the payback period
for B notes from 7.75 years to 8.00 years.
Testing the sensitivity of the portfolio’s valuations, in the 2008 launch year scenario under the
fourth-quartile stress, the break-even haircut to NAV at launch for A notes is 13%. The same
figure for B notes under the third-quartile stress is 26%. For the 2005 launch year scenario, the
break-even NAV haircut at launch is 28% for A notes under the fourth-quartile stress and 37%
for B notes under the third-quartile stress.
Valuations
PE fund valuations are generally made available quarterly on an unaudited basis and annually on
an audited basis. Fund managers apply various valuation methods (discounted cash flow analysis,
multiple analysis and so on) to the underlying holdings of the funds. Valuations are made as of a
certain date and are reported to the LPs a few months following the valuation reference date.
Valuation methods can vary from fund to fund, as managers have discretion on the applied
techniques. However, these valuations are prepared in accordance with International Financial
Reporting Standards or generally accepted accounting principles in the U.S. or elsewhere.
Managers may report on the valuation methods applied to each underlying holding. While most GPs
do not specify exactly how they valued their funds’ holdings, Fitch reviewed a sample as well as the
top underlying portfolio holdings for the reasonableness of valuations where reporting was available.
For example, a venture fund in the portfolio acquired a technology company during its series A-1
funding. After six years and three additional investments by the fund, the company was valued at
approximately an 8.0x multiple based on the company’s latest funding round. The portfolio company
experienced another large increase in valuation owing to a bid the fund was expecting for an
acquisition. The company was acquired in the following quarter at a 22.0x multiple.
The initial valuation of Nassau CFO was based on the reported NAVs of the funds as of the latest
reported NAV valuation date. Most of the reported NAVs of the funds were valued as of March 31,
2019, with six of the reported NAVs of the funds valued as of Dec. 31, 2018. The NAV valuations for
each fund were then adjusted for any capital calls and distributions made between the time of
valuation and June 30, 2019.
Going forward, the valuation of the structure’s NAV will be made at each determination date based
on the most recent audited or unaudited NAVs provided by the underlying GPs. The valuations
provided by each GP will be adjusted for any distributions (subtracted from NAV) and capital calls
(added to NAV) made between the reference date of the GP’s valuation and the distribution date of
the structure. Recording the NAVs of the underlying funds, and then building those into the overall
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PE CFO NAV is the responsibility of the transaction manager. The structure’s NAV will be reconciled
to the underlying funds’ capital accounts during the annual audit of the structure.
The Manager
Fitch considers NAI suitably qualified, competent and capable of executing its transaction functions
as the investment manager of Nassau CFO.
Nassau Financial Group is an insurance company founded in 2015 with PE fund backing, with $19.6
billion in assets under management across fixed income and alternatives, as of March 31, 2019.
Since 2016, Nassau Financial Group acquired several insurance companies, including The Phoenix
Companies and Constitution Life. Nassau Asset Management LLC (NAMCO) provides investment
management services to certain of its affiliates, including NNY. NAI is a subsidiary of NAMCO and
will act as the investment manager for Nassau CFO.
NAMCO has four investment management platforms, NAI, Nassau Corporate Credit, Nassau
CorAmerica and Nassau Private Credit (three of which are registered investment advisers). NAMCO
manages Nassau’s $19.6 billion in AUM across high-grade private placements, CLOs, commercial
mortgage debt and alternatives. NAI is an SEC registered adviser. NAMCO has 29 employees
across all investment management platforms, with four employees currently at NAI. NAI expects to
increase the number of employees as its platform expands. NAI has access to operational
resources made available by NAMCO to assist in managing Nassau CFO.
The investment manager and its affiliates and employees have a long track record investing in PE
beginning in the 1980s, and the management team has significant experience in the sector. Fund
investments span multiple strategies including buyout, venture capital, mezzanine debt, and co-
investment opportunities in equity and mezzanine debt.
NAI’s stand-alone PE team consists of four investment professionals. In recent years, the staff at
NAMCO involved in investment and operational decisions for the PE portfolio included six members
on the investment committee, five on the investment staff (with one overlapping the staff and the
committee), and six operational staff members. Most of the PE experience comes from two existing
investment professionals and two previous staff members, with one key professional primarily
focused on the relationships with the fund managers, sourcing PE investments and analyzing
investments. This may pose a key man risk to the transaction. However, NAMCO has in recent
years increased its staff. In addition, Nassau CFO is a static portfolio of mature PE investments
without a reinvestment period. The portfolio is not expected to require very active management that
would involve significant investment decisions to be made once the transaction is launched. Material
decisions of the investment manager will likely be limited to fund dispositions as allowed by the
transaction documents. NAMCO’s broader experience and staffing actively managing CLOs and
real estate may be able to support NAI’s role as investment manager in Nassau CFO if needed. A
significant portion of the work required by the manager will be focused on operational aspects of the
funds and the transaction, such as funding fund capital calls, and recording and reporting on cash
flows and NAV. Fitch views the static portfolio, limited active management, NAMCO’s broader
investment management platform, as well as the presence of other personnel with PE experience,
as mitigants to the relatively smaller size of the NAI team.
The investment manager will manage the fund investments, administer key fund matters, manage
eligible investments, supervise the administration of assets and notes, make capital calls on the
issuer, operate the liquidity facility, manage cash flows in accordance with the priority of payments,
manage investor relations and reporting to stakeholders, and perform various other administration
and management services with respect to AssetCo and the issuer.
The manager will enter into a management agreement with the issuer and will receive a
management fee for performing such services. The fees to the manager include a senior fee of
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0.50%, a junior fee of 0.25%, and a performance incentive fee equal to 10% of the cumulative
distributions to the equity after an 8% equity return performance hurdle is met. The fees for Nassau
CFO were structured to be similar to the fees of a PE fund of funds.
NAI has been appointed to act as the investment manager until AssetCo and Nassau CFO are
dissolved. Either the issuer or AssetCo can terminate the services of NAI as investment manager at
any time for certain reasons as specified in the management agreement, such as for failing to fulfill
its responsibilities or missing a capital call. Absent the occurrence of a specific termination event, the
investment manager may resign upon 30 days’ written notice provided to AssetCo, the issuer and
the trustee.
However, the termination or resignation shall not be effective until the appointment of a
satisfactory replacement investment manager whose appointment does not result in the reduction
or withdrawal of the ratings on the notes. If no replacement investment manager has been
engaged within 60 days after the applicable notice of termination or resignation, the investment
manager, AssetCo or the issuer may petition a court for the appointment of a duly registered
investment adviser to serve as a replacement investment manager. Fitch believes these terms
provide a sufficient procedural framework to find a suitable replacement investment manager in
the event one should become necessary.
Alignment of Interests
Fitch observes an alignment of interests in this transaction between the sponsor and noteholders
given the sponsor’s equity commitment in the transaction. The sponsor and its affiliates will maintain
at least a majority ownership of the equity position. As the owners of the equity, the sponsor and its
affiliates will bear any losses of the structure prior to noteholders, providing for the alignment of
interests.
Security and Bankruptcy Remoteness
Noteholders and the liquidity facility are secured by the assets of the issuer, including its
accounts and its interest in AssetCo. PE fund interests are generally prohibited by their
partnership agreements from being pledged as collateral. For this reason, the dual SPV
structure is common in PE CFOs, where AssetCo holds the PE fund interests and the issuer
pledges its interest in AssetCo to noteholders. AssetCo is also guaranteeing the notes to give
noteholders a direct claim against AssetCo, and it gives noteholders a perfected security
interest in AssetCo’s bank accounts and the money in those accounts.
Fitch expects that in a default scenario, noteholders and the trustee may decide whether to continue
waiting for additional distributions from underlying funds, sell interests in AssetCo as a whole to raise
cash to repay the issuer’s obligations, or obtain consent from the GPs of underlying funds and sell
individual fund interests on the secondary market. Fitch believes GPs are likely to provide consent to
transfer fund interests, as the GPs would likely prefer to have non-defaulted limited partners.
Fitch notes that ongoing material obligations, like the unfunded capital commitments of AssetCo, are
unique to PE CFOs and unusual in structured finance transactions. This presents a risk that if
AssetCo does not meet a capital call obligation, one or more GPs of the portfolio’s funds may
pursue claims against AssetCo, and potentially cause it to enter bankruptcy proceedings. However,
there are a number of mitigants to this risk. Fitch’s analysis takes into account the transaction’s
available liquidity and ability to pay capital call obligations, assessing the risk that capital calls are
not paid due to insufficient cash flows. Fitch also reviews the transaction manager’s operational
capabilities and historical performance in meeting capital calls, as well as the alignment of incentives
between the manager and noteholders, to assess the risk that capital calls are not paid due to
mismanagement. The manager also has the ability to deliberately not pay capital calls in limited
circumstances, such as if it disputes the validity of the capital call or if it believes it is not in the best
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interest of the transaction to pay the capital call. In that case, we believe it is unlikely that a GP will
be able to successfully cause a bankruptcy filing of AssetCo. Finally, GPs historically exercised
other remedies available to them to address a default on a capital call, aside from pursuing a claim
or bankruptcy proceeding against the LP, because of the time, expense and potential reputational
damage associated with a GP’s pursuing claims against its LPs. A typical remedy to capital call
defaults includes forfeiture of some or all of the LP’s interest in the fund. For the reasons above we
consider the bankruptcy risk to AssetCo associated with its capital call obligations as sufficiently
remote within the scope of Fitch’s rating.
Fitch has not yet received and reviewed legal opinions related to the transaction.
Fitch expects that the opinions will provide that the issuer is bankruptcy remote, that its assets
cannot be consolidated with those of the sponsor and that the transfer of the fund investments under
the purchase agreements would be characterized as a sale of rights over the fund investments and
would not be regarded as property of the seller in the event of the seller’s insolvency. If the legal
opinions Fitch receives are not in line with its criteria, this could lead to final ratings different from the
expected ratings noted in this report.
The Model
Fitch performed the cash flow analysis of the structure using a model to forecast hypothetical
portfolio cash flows using historical PE data. PE data were sourced from a third-party data provider
and covered all quartiles of funds with vintages ranging from 1990 to 2018. The dataset
encompassed buyout, mezzanine, debt and venture capital funds to parallel the underlying
breakdown of the Nassau CFO portfolio. The major data points driving the analysis include historical
capital calls, historical distributions and historical NAV appreciation and depreciation. The historical
data within each dataset were extrapolated to simulate the average historical cash flow of a
representative PE fund. The historical cash flows were built up, as described in the Cash Flow
Scenario Analysis section, to forecast the cash flows of Nassau CFO’s portfolio of PE holdings.
The model applied the cash flows, as described above, to the priority of payments (see Appendix,
pages 2122) to simulate the performance of the transaction.
Additionally, the model allowed hypothetical launch dates for the transaction to forecast
performance if Nassau CFO was launched during various market cycles. This analysis used
observed historical cash flows where available and applied these to the underlying portfolio based
on the PE fund age and strategy profile of Nassau CFO’s holdings. This model provided the ability
to run the analyses described in the Cash Flow Scenario Analysis section.
For example, if the transaction was launched in 2005 and 10% of the NAV comprised two-year-old
buyout funds at that time, the model would apply the observed historical performance for two-year-
old buyout funds in 2005 to 10% of the portfolio. This would then be replicated for the remaining
90% of the portfolio NAV for the observed performance of each age and strategy in 2005. The
analysis would then apply the same methodology to the remaining life of the transaction where
historical performance data are available. If no data are available for a certain age in a certain year,
the model applies the average historical performance for that age and strategy across vintages.
Surveillance of the Transaction
Fitch relied on information on the underlying funds for its analysis and will continue to do so for
the ongoing surveillance of Nassau CFO. Fitch will also receive quarterly reporting from the
issuer on an ongoing basis throughout the life of the transaction, which aligns with the
distribution dates of the notes. Quarterly reporting will detail any cash flows for the period
(distributions, capital calls and so on), balances of assets and liabilities, qualified investments,
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Nassau 2019 CFO LLC 20
August 9, 2019
periodic payments made at each level of the structure’s waterfall, LTV calculations and
updated valuation data for Nassau CFO’s PE holdings.
Rating Sensitivities
PE collateralized fund obligations have many inherent risks, including the uncertainty of the amount
and timing of distributions, illiquid nature of investments, the degree of transaction leverage and the
subjective nature of NAV calculations.
The expected ratings for the notes may be subject to downgrade if cash flows are lower than
modeled in stress scenarios, creating a risk that the funds will not generate enough overall cash to
repay the issuer’s obligations. A material decline in NAV that, in Fitch’s view, would indicate
insufficient forthcoming cash distributions to support the notes could also lead to rating downgrades.
The ratings of class B notes may be upgraded in the future if distributions are strong and CE on the
class B notes increases. The ratings uplift on class B notes will be subject to the rating cap for PE
CFO transactions and the rating cap of the ‘Asf’ category owing to the deferred interest feature of
the class B notes.
A ratings downgrade of a counterparty may also materially affect the ratings of the notes, given the
reliance of the issuer on counterparties to provide functions, including providers of the liquidity loan
facility and bank accounts.
Fitch relied in its analysis on the legal documentation and opinions for the transaction. If any relevant
party to the transaction does not follow its responsibilities and procedures as described in the
documentation, the ratings on the notes may be affected.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 21
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Appendix: Terms of the Notes
Ordinary Priority of Payments
Unless a liquidation event has occurred and is continuing, on each distribution date, payments
are to be made using all funds on deposit in the payment account on the determination date in
the following order of priority:
1. Payment to (x) and (y) with an annual cap of $500,000:
(x) First, taxes and registration and filing fees.
(y) Second, administrative expenses in the following order of priority:
(i) Trustee and calculation agent expenses with an annual cap of $250,000.
(ii) Liquidity facility expenses other than commitment fees and interest.
(iii) Issuer and AssetCo fees and expenses.
(iv) Investment manager fees and expenses.
2. Payment to:
(i) First, commitment fees of the liquidity facility.
(ii) Second, senior management fees.
3. Payment to:
(i) First, accrued and unpaid interest on the liquidity facility.
(ii) Second, return on the preferred interests.
4. Accrued and unpaid interest on the class A notes.
5. Payment to:
(i) First, outstanding balance on the liquidity facility.
(ii) Second, outstanding preferred interest amounts.
(iii) Third, from proceeds from selling fund investments only, to the payment of
class A notes with the prepayment premium.
6. Prior to the controlled amortization period, to the cash collateral account at the
discretion of the investment manager as long as it does not cause an LTV
breach.
7. If the LTV ratio is greater than 50%, to the principal of class A notes until the LTV
ratio is equal to 50%.
8. Payment to:
(i) First, accrued and unpaid interest on class B notes and class B deferred
interest.
(ii) Second, class B deferred interest.
9. If the LTV ratio is greater than 70%, to the principal of class B notes until the LTV
ratio is equal to 70%.
10. During the controlled amortization period, to the principal of class A notes at 50%
of the remaining available funds after clause 9 up to the outstanding balance of
class A notes.
11. During the controlled amortization period, to the principal of class B notes at 20%
of the remaining available funds after clause 9 up to the outstanding balance of
class B notes.
12. During the clean-up amortization period, to the principal of class A notes until
class A notes are paid in full.
13. During the clean-up amortization period, to the principal of class B notes until
class B notes are paid in full.
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Nassau 2019 CFO LLC 22
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14. During the controlled amortization period, at the discretion of the issuer, optional
repayment pro rata to the class A notes and class B notes plus the applicable
prepayment premium.
15. Payment, on a pro-rata basis, to:
(i) Administrative expenses in excess of the annual cap.
(ii) Excess interest due if notes are accelerated.
16. At the discretion of the investment manager, to the issuer account to fund future
capital calls, future prepayments on the notes, future repayment of the liquidity
facility or preferred interests, or future payment of administrative expenses.
17. Payment to subordinate management fees.
18. Before the performance threshold is met, payment to equityholders.
19. After the performance threshold is met, payment to the investment manager until
the investment manager receives 10% of the total distributions received under
clauses 18 and 19.
20. 10% of remaining funds to the investment manager for the performance incentive
fee and 90% to the equityholders.
Liquidation Priority of Payments
If a liquidation event has occurred and is continuing, on each distribution date, payments are to
be made using all funds on deposit in the payment account, issuer account, cash collateral
account, fund investment contribution account not needed to pay capital calls, and any
proceeds of AssetCo collateral (includes collection account, custodial account and capital call
account), on the determination date in the following order of priority:
1. Payment to clauses (1) and (2) of the ordinary priority of payments without regard
to annual caps.
2. Payment to:
(i) First, accrued and unpaid interest on the liquidity facility.
(ii) Second, return on the preferred interests.
(iii) Third, outstanding principal of the liquidity facility.
(iv) Fourth, outstanding preferred interest amounts.
3. Payment to the accrued and unpaid interest on class A notes.
4. Payment to the principal of class A notes until class A notes are paid in full.
5. Payment to the accrued and unpaid interest on class B notes.
6. Payment to the principal of class B notes until class B notes are paid in full.
7. Payment to subordinate management fees.
8. Before the performance threshold is met, payment to equityholders.
9. After the performance threshold is met, payment to the investment manager until
the investment manager receives 10% of the total distributions received under
clauses 8 and 9.
10. 10% of remaining funds to the investment manager for the performance incentive
fee and 90% to the equityholders.
Fund and Asset Manager Rating Group
Nassau 2019 CFO LLC 23
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