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Although transfers by investors of their interests in a fund have always been a feature of subscription / capital call facilities, as of late, there has been a palpable uptick in investor transfers and this trend is set to continue, due to a multitude of factors.
This article explores the driving factors for the increase in investor transfers, the implications for rated subscription facilities and securitisations, how loan documents customarily deal with investor transfers, and due diligence considerations.
As was briefly touched upon in a prior Fund Finance Friday article “Borrowing Base/Coverage Ratio Approaches in Subscription Finance Facilities,” a subscription facility which uses the borrowing base approach looks at each investor’s commitment to fund and the administrative agent and/or lenders deciding the level of credit that will be given to such commitment for those investors. In certain instances there may be investors that are initially excluded from the Borrowing Base due to certain side letter provisions (i.e., cease funding rights or sovereign immunity), lack of creditworthiness or other legal issues, whereby the lender is concerned about including such investor’s capital commitment in the Borrowing Base and its ability to ultimately be able to call capital on such investor.
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).