By Shankar Ramakrishnan

May 28 (Reuters) - Banks and insurers are making more

requests to U.S. credit agencies for ratings on their risky

loans to private equity funds that are secured against the value

of their portfolio investments and cash flows that come from

them.

So far, the response from the agencies including the top 3

- S&P, Moody's and Fitch - has been cautious because

the valuation of the assets backing the loans are difficult to

assess as they are owned by an opaque investor base.

A higher-for-longer interest rate environment over the last

few years has limited opportunities for private equity fund

managers to profitably exit investments in their portfolios.

They are instead starting to rely on loans to reinvest in

existing portfolio companies, wait for a better time to exit

these investments, make new acquisitions or pay dividends to

their investors in the funds.

This activity has raised concerns about so-called leverage on

leverage in private credit, a growing area of private fund

finance.

Lenders are now approaching rating agencies to get credit

ratings on their loans in a bid to lower the amount of capital

needed on these loans and as an added due-diligence of the risk,

senior rating officials said.

Agencies are balancing this fee-generating potential with a

methodical approach.

Only two - S&P Global Ratings and KBRA - of the four

agencies interviewed by Reuters rate net-asset value or NAV

loans which are riskier because they are secured based on the

theoretical valuation of an almost fully invested fund.

Valuations are much harder to assess in an environment where

default rates in the invested portfolio companies are expected

to rise as they struggle with higher interest expenses.

These loans have a shorter history in comparison to other

types as their demand and wider use rose only in the last few

years as exits through asset sales became harder in a

higher-for-longer rate environment.

Their volumes are growing.

"We expect the approximately $150 billion in NAV facilities

that some market participants have currently seen in the market

to double within the next two years," S&P said in a recent

report.

But only one of the top 3 rating agencies even has a

methodology to rate them.

Moody's Ratings does not have one for NAV loans, said its

associate managing director, Rory Callagy.

"NAV loans are newer and there is less standardization of

lending terms in this market," said Callagy.

"The collateral backing NAV loans are private investments

whose values can be hard to assess because there is less

transparency on the valuation of the assets," he added.

METHODICAL APPROACH

Assessing the credit risk of NAV loans "requires a strong

understanding of the quality of a fund's portfolio and the key

structural provisions, like loan-to-value ratios, and its use of

distributions and exit proceeds," said Gopal Narsimhamurthy,

global head of fund rating at KBRA, which has rated nearly 100

NAV loans over the last couple of years.

The agency's analytical process includes an evaluation of a

fund manager's performance history, valuation process track

record, the legal structure and security provisions of the NAV

loan, he said.

S&P has been actively rating NAV loans for more than 20

years but only gives private ratings on request on a small

fraction of the debt.

The firm starts by assessing a fund's performance through

the asset portfolios with stress scenarios seen during the 2008

financial crisis.

"We begin by haircutting the value of the fund by 40-60%

depending on whether the assets are private equity, listed

equity or a bond portfolio to ascertain whether the fund would

still have the capability to pay its debt in a severe stress

scenario," said S&P's Nik Khakee, methodologies managing

director.

And this review is contingent on an obligation for regular

disclosures by the borrower, said Devi Aurora, financial

institutions managing director, S&P Global Ratings.

Fitch is working on a methodology to rate NAV loans.

When it does have it, Fitch wants to start with rating NAV

loans backed by secondaries or funds comprised of private market

investments which transacted in the secondary market, said Greg

Fayvilevich, head of Fitch Ratings' fund and asset manager

ratings group.

Secondaries have a visible starting point to value an asset

unlike loans backed by buyouts whose repayments hinged on an

exit through an IPO or asset sale.

"We are being asked by the market to provide ratings to help

investors assess the risks of these loans, and we will do that

where we feel we have enough information to provide an accurate

assessment," said Fitch's Fayvilevich.

"Where we don't have enough information then we won't assign

ratings - it's pretty straightforward," he added.