USA Trends and Developments Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
Asset valuation mechanic Most NAV facilities feature a robust mechanic relating to the valuation of the collateral, as the assessed value determines the LTV ratio and, by extension, how much the fund can borrow under the facility. NAV facilities typically include valuation challenge rights, where a lender that doubts the accuracy of a sponsor’s asset valua - tion can have a third-party valuation firm provide a second opinion. Historically, lenders had more robust rights to challenge the valuations provid - ed by borrowers, including built-in requirements for third-party appraisals and periodic revalua - tions. Recent trends show a shift towards more lenient terms, with fewer triggers available to lenders for valuation challenges, shorter time - frames during which lenders may dispute valu - ations, limitations on the number of times each year that lenders may challenge valuations, and a requirement for a larger gap between the bor - rower’s valuation and the valuation of the third- party appraiser in order for the valuation to be changed and the borrower to be required to pay the cost of the appraisal. Financial covenants Unlike subscription credit facilities, NAV credit facilities often incorporate financial covenants and triggers that enable a lender to monitor the overall health of the fund and flag potential trouble early on. These triggers include, in addi - tion to the LTV ratio, minimum net asset value, interest coverage ratios (which assess a fund’s ability to generate sufficient cash to pay interest on its debt), and liquidity requirements (which require a fund to maintain a minimum amount of cash and cash equivalents at all times). As the market has become more competitive, lenders have loosened some of these tests and given up others entirely.
Impact of Growth of NAV Financing Market on Facility Terms As new lenders have piled into the NAV market and existing lenders have expanded their NAV loan books, market pressure has led to a loos - ening of some of the core terms applicable to these facilities. In particular, more established NAV lenders have observed that the entrance of newer players into the market and their will - ingness to accept looser terms in order to gain market share has led to a general softening of the terms for these facilities. Loan-to-value ratio Nearly every NAV facility will have a covenant based on the fund’s loan-to-value (LTV) ratio, which limits the amount of borrowing by the fund to a percentage of the NAV. This ratio helps man - age the lender’s risk by capping the borrowed amount at a certain proportion of the fund’s asset value, ensuring that there is sufficient value in the fund assets for the lender to be fully repaid should the facility go into default. The maximum LTV ratio in a NAV facility varies depending on the quality and liquidity of the underlying assets. In addition, the calculation of the “value” com - ponent of the LTV ratio typically incorporates eligibility criteria; only those assets that satisfy the eligibility criteria will be counted towards the calculation of the LTV ratio. In general, LTV ratios for NAV facilities range from 5-20% for concentrated or illiquid port - folios to over 50% for very liquid and diverse portfolios. These percentages have crept up over the past year due to the increase in market competition and the push by fund sponsors to access additional liquidity. In addition, eligibil - ity criteria have loosened as well, with lenders showing more flexibility to give credit for assets in different jurisdictions and of different types and liquidity profiles than they have in the past.
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