Private equity CDO completed

CMFG Life Insurance Company has completed a rare private equity collateralised fund obligation (PE CFO). Dubbed MCA Fund III Holding 2020-1, the transaction is structured as a dual SPV and is backed by a diverse pool of private equity funds, with approximately US$574.7m in net asset value and US$189.7m of unfunded capital commitments.

The predominantly static portfolio comprises 64 commingled funds, two commingled co-investment funds and five co-investments managed by 57 fund managers, as of 30 June 2020. It has 848 underlying holdings in non-secondaries funds and 488 underlying fund LP interests and other positions in secondaries funds. The portfolio is also diverse in terms of vintage, with exposures from 2014 to 2017.

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. CMFG will fund the capital calls.

Cashflows generated by the funds will be used to pay off the notes, as well as pay interest and expenses. Interest payments are deferrable in the case of the cashflow being insufficient.

Fitch notes that the portfolio has a material exposure to debt funds, which typically provide steadier cashflows relative to buyout funds. For this reason, cash shortfalls are less likely in a downturn scenario.

Smaller liquidity needs will be covered by distributions from underlying funds, such as the transaction’s income-producing funds. However, a limitation is the underlying fund LPA pledging collateral.

DBRS Morningstar and Fitch have assigned a single-A rating to the deal’s US$229.8m class A notes (which priced with a coupon of 3.25%), a triple-B rating to the US$100.6m class B notes (4.25%) and a double-B rating to the US$71.8m class C notes. The notes demonstrate a sufficient level of credit enhancement, with the LTV set at 40% for the class A notes, 57.5% for the class B notes and 70% for the class C notes.

The investment manager of the transaction is MEMBERS Capital Advisors.

Jasleen Mann