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“By the time you finish your career, you will have worked at three different firms and will have practiced in three different areas of the law,” I heard from one of my mentors when I was a first‑year associate at my first law firm, Michael Best & Friedrich (MBF). Looking back, that prediction proved spot‑on.
The term “boilerplate” originates from the printing industry, where “boilerplate” referred to metal plates with standardized text used for newspapers and other publications. In legal documents and contracts, boilerplate refers to standard clauses or sections that are common to most agreements and address general terms and conditions, such as dispute resolution, commencement, venue, choice of law, confidentiality, indemnification, etc.
When thinking about topics for Fund Finance Friday, the best source of content is most often the questions and issues that arise in day-to-day discussions and negotiations. The idea for this article popped up recently during a negotiation of a credit agreement and impacted a boilerplate section that doesn’t get discussed as often as some others. In this situation, the borrower was particularly concerned about the lender directly contacting their investors in the normal course (i.e., other than during an enforcement scenario). The usual assurances that the lender would not randomly contact investors during non-enforcement failed to alleviate the borrower’s concerns.
As a result, the lender agreed to modify the typical standstill and power of attorney language to specifically state that the lender would not contact investors outside of enforcement. Issue resolved? We thought so. However, as drafts were exchanged, it became clear that the borrower sought to not only have the lender affirmatively state that it would not contact its investors, but also wanted recourse against the lender should the no-contact agreement be violated – regardless of the circumstance.
As a lending lawyer for more than a quarter century at this point, I have seen that deposit accounts and deposit account control agreements are a routine component of virtually every transaction. Deposit accounts are a source of high quality, easily realizable collateral for lenders in any secured loan transaction. However, following the regional bank crisis early last year, my perspective of deposits shifted. They were no longer simply another asset class of collateral for my bank clients. Instead, unfortunately, I saw first-hand how deposits are inseparably linked to the ability of our clients to not only make the loans we help them provide, but also to thrive as financial institutions.
The key component of any subscription credit facility is the underlying capital commitments that are pledged to secure the facility. Virtually every lender will require some level of over-collateralization – meaning, investor commitments will never receive dollar-for-dollar credit relative to the size of the facility (which would be a 100% advance rate).
When the U.S. Small Business Administration’s revised rules for its Small Business Investment Company program went into effect last August, it looked like a greenfield market for capital call financing had been opened. For the first time, the agency permitted capital call financing to levered SBICs without requiring SBA pre-approval. Given that the 298 active SBICs manage more than $40 billion in AUM and hold more than $10 billion in unfunded commitments, the opportunity looked rather compelling. But for reasons that we expand on here, limitations the collateral package and lender remedies may lead lenders to treat SBIC capital call lines more like a low advance-rate, unsecured product (with certain enhancements) and less like traditional subscription line of credit.
Following the disruption in the market in March of this year, with the FDIC seizing three major middle-market lenders one of the questions on many people’s minds was – where were our bankers, colleagues, clients and friends going to land?
With the recent wave of displacements occurring in our industry, we have been fielding a higher level of calls from clients looking for a “cheat sheet” that they can pass along to their new credit officers who have varying levels of understanding of the credit support of the subscription loan product. While most of these fundamentals are contained in prior Fund Finance Friday editions, the goal of this article is to not only summarize those prior articles (with linked references that provide a deeper dive if desired) but also to target the discussion to a credit audience that may be somewhat new to the underpinnings of subscription finance.
In order for fund credit parties to maintain flexibility for investments and meet the changing requirements of investor requirements (tax, ERISA, etc.), they often need to establish multiple investment vehicles to accommodate those requirements. This article touches on some of the options that a Main Fund borrower has when setting up these additional vehicles together with what a lender needs or expects as a result of each approach.
With communication avenues evolving and remote options only increasing, we certainly aren’t going back to the “good old days” of all-hands page flips and in-person closings. Combine that with Fax Rooms and FedEx deadlines, while certainly “old,” were those days even “good”? Arguably, no – traveling across the continent to closings lugging file briefcases while worried that your documents (on disk) might be destroyed by airport metal detectors isn’t something I want to go back to. Don’t worry. This isn’t a collection of “Back in my day, I walked to the courthouse uphill, both ways – in the snow” stories. I’m not interested in going back to the “good old days.” However, that isn’t to say that there weren’t some positives from those days that we should try and salvage or recreate that may make our jobs easier and even provide a smile later in our careers.
It happened in an instant. Almost overnight Russia, the world’s eleventh-largest economy, was transformed from an important player in global financial markets – both as a destination for investment and a source of capital – into a country shunned by much of the international community. In response to Moscow’s invasion of Ukraine, the United States, European Union, and United Kingdom, along with a host of other countries, have imposed crushing economic sanctions impacting nearly every corner of Russia’s economy.