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April 2023 | Issue 253

Rated-note feeder funds emerge as CFO alternative

Sayed Kadiri headshot
Sayed Kadiri
Insurance companies are increasingly looking to invest efficiently in credit products. The resurgence of collateralised fund obligations has been well documented, but sources say rated-note feeders are also gaining in popularity.
“There has been a big uptick in demand over the past couple of years”
Jessica Marlin, Co-head of CLOs | Ropes & Gray
Functionally, CFOs and rated-note feeders serve a similar purpose — they create a debt and equity structure through which investors can gain exposure to fund investments. But whereas CFOs are typically backed by a range of funds and have their liabilities syndicated, rated-note feeders usually relate to a single underlying fund.
What they have in common is that insurers are using both as a means to buy into private credit funds.
“The insurance world is excited about accessing private credit funds,” says Boston-based Jason Kolman, a partner at law firm Ropes & Gray. “For insurers looking to achieve more favourable regulatory capital treatment, it is relatively easier to do so via a feeder fund compared to a CFO, which can take longer to put together.”
Kolman says a rated-note feeder is a simpler structure than a CFO. Usually, both involve insurance companies buying the debt and equity of a newly-formed feeder fund that invests into a sponsor’s underlying credit fund, with the overall investment weighted towards the debt.
For insurers, the rationale is that the debt portion of the investment attracts a low capital charge, and this makes it a more appealing structure compared to a direct stake in the equity of a credit fund.
Jessica Marlin, a partner at Ropes & Gray in New York, says rated-note feeders are a relatively recent development.
“There has been a big uptick in demand over the past couple of years,” she says. “Sponsors and investors have come up with ways to make the process and documentation more streamlined over time.”
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Global credit funds & CLO's
April 2023 | Issue 253
Published in London & New York.
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