The methodology outlines ARC Ratings’ process for rating Subscription Credit Facilities (‘SCFs’), a type of fund finance extended as a short-term line of credit provided mainly to private capital funds to help manage their liquidity.

SCFs, also known as capital call facilities, are collateralised by the uncalled capital commitments of a fund’s Limited Partners (‘LPs’) and are used to bridge the timing gap between the execution of investments and receipt of commitment capital. SCFs are revolving facilities whereby a borrowing base approach is used with an agreed advance rate per LP against the uncalled committed capital of each LP. Thus, the primary credit risk associated with an SCF is an LP default, and typically, the advance rates of each LP in the SCP vary based on the credit quality of the underlying LP.

ARC’s process for rating SCF is based on a quantitative and a qualitative assessment. ARC’s quantitative process for rating SCFs begins with assessing the LP’s capacity to comply with capital calls by assigning a credit assumption to each LP. Subsequently, ARC relies on its Portfolio Risk Calculator (‘PRC’) model, where ARC’s qualitative assessment will inform its quantitative assumptions.