Fitch: Weaker fund finance structures may heighten credit volatility

Fund finance terms in private credit are weakening across products due to competition and liquidity challenges, which could overall increase the likelihood of credit volatility, according to Fitch Ratings.

Fitch has reported that weaker structural features are emerging across a range of fund finance instruments, including net asset value (NAV) loans, continuation vehicle (CV) financings, rated note feeders (RNFs), collateralised fund obligations (CFOs), and subscription facilities (sub-lines).

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The ratings agency cautioned that the shift towards looser structures and higher leverage could amplify credit volatility across segments, especially if market conditions deteriorate.

According to Fitch, sponsors are pushing for looser terms amid tough fundraising conditions and limited exit opportunities, which are increasing the need for liquidity. Banks, private credit funds, and insurance-linked investors have shown growing appetite to deploy capital into these products, which has intensified competition and eroded lender protections.

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RNFs and CFOs, which were historically backed by diversified collateral pools, are now shifting toward more concentrated and sometimes more volatile portfolios, Fitch warned. Overall, higher loan-to-value (LTV) ratios and weaker diversification could heighten exposure to valuation swings and refinancing risk.

NAV loans and CV financings are also becoming more aggressive, with higher advance rates and longer sweep holidays. Some CV financings are now reaching 95 per cent to 100 per cent advance rates against single assets, raising concerns about investor concentration and the resilience of limited partners in a downturn.

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