NAV, ABL, leverage facilities, call them what you will, but they are on the rise. These facilities offer lenders good rates of return in an increasingly competitive market and offer borrowers additional ways to inject liquidity. For funds finance providers looking to offer full-service financing options to their customers and for borrowers looking to tap into their investment value, these facilities provide new areas for growth and are one of the main areas of focus for the industry today.
Whether you want to lend or borrow these facilities, to navigate this area of funds finance you need to understand the key pressure points. To assist with that process we have put together an initial list of pointers to help you cut through the noise.
A useful checklist
- Asset class – what are the assets, where are they located and do they generate cash flows?
- NAV – where does the value lie? What will be the day-one and ongoing valuation criteria? What will be the revaluation events?
- Borrowing base vs LTV – it's your choice but what is your preference and why?
- Eligibility Criteria - will there be any complete veto rights? Can all asset classes qualify? What will be the exclusion events? Do you need to preserve diversity with concentration limits?
- Cash sweep – will there be one and should there always be one? Is a cash sweep trigger event or ratcheting cash sweep appropriate?
- Don’t forget to look down – how far are the underlying assets from the NAV facility? What lies in between and is subordination an issue?
- Don’t forget to look up – consider the capital call bridge. Can it be combined into a hybrid facility? Does it impact on the NAV facility?
- Financial covenants – is LTV enough?
- DD – early DD is key. Look for change of control triggers and the all-important consents to security.
- Debt fund specifics – what will be the classification criteria for each debt type? Underlying leverage, maturity requirements and treatment of delayed draw loans need to be considered.
- PE fund specifics – portfolio control can be a stress point and flows into areas such as security and facility covenants but ultimately it will come down to the ownership interest. Will there be any minimum equity requirements? Are there are any unfunded commitments?
- Security – just because security can be taken, should it be? What is the cost/benefit analysis? Is there a single point of enforcement? Don’t forget the receivables.
- Securitisation – are there any risk retention requirements? Who is the originator? Is structuring the transaction as a securitisation beneficial?
- Lender and borrower harmony – the complexity associated with these transactions means a common approach and a focus on the future relationship will be a priority.