USA – NEW YORK Trends and Developments Contributed by: Sheel Patel, Perry Hicks, Linda Boss, Jason Friedman and Ben Snyder, Mayer Brown LLP
Private Credit Portfolio Back Leverage Facilities At a glance The rise of the private credit market has led to a dramatic increase in supporting liquidity strat - egies to optimise the market. These strategies include the use of financings to provide market participants with leverage and/or supplemental liquidity to support their private credit activities. These financings go by various names, includ - ing private credit ABL, SPV drop-down, CLO-lite and CLO warehouse, among others, but have a common general structure that draws from tra - ditional secured lending and structured financing transactions. In this article, we address some of the basic characteristics, structural considera - tions and complexities that are present in these financings. Benefits and basic structure Private credit portfolio back leverage, also com - monly referred to by other names, including SPV drop-down facilities, CLO warehouse, CLO-lite, ABL CLO facilities or simply back leverage, among others, is meant to provide financing to private credit providers. While the nomenclature is not consistent, the benefits and the financing structures are. A typical private credit portfo - lio back leverage facility will have the following structure. The private credit provider (the “Non- Bank Lender” ) creates a special purpose vehi - cle (the “SPV Borrower” ) that is 100% owned (directly or indirectly) by the Non-Bank Lender that will enter into a facility (the “Loan Agree- ment” ) with one or more financial institutions as lenders (the “Lenders” ). The collateral securing the Loan Agreement will predominantly consist of a revolving pool of private credit loan obliga - tions under which the Non-Bank Lender acts as lender ( “Loan Assets” ). The Loan Assets are sold or contributed by the Non-Bank Lender to the SPV Borrower pursuant to a sale or contribution
agreement. The sale or contribution is intended to transfer legal title of the Loan Assets to the SPV Borrower so that the financial and opera - tional risk of the Non-Bank Lender (including a Non-Bank Lender bankruptcy) does not impact the SPV Borrower or its assets. Collections on the Loan Assets, paid by the underlying obligors, are deposited directly into a controlled account, and such collections are released at designated dates under the Loan Agreement in accordance with a negotiated waterfall of payments to the appropriate parties (as described in more detail below). The Non-Bank Lender or one of its affili - ates will often act as servicer or collateral man - ager ( “Servicer” ) under the Loan Agreement, and will be responsible for the servicing, administra - tion and management of the Loan Assets. The transaction documents for the facility will generally consist of a loan and security agree - ment, a sale or contribution agreement, one or more fee letters, and a securities account control agreement that will cover a group of accounts opened in the name of the SPV Borrower, each with specified purposes (depending on the transaction, such accounts could include an account to receive interest collections, a sepa - rate account for principal collections, a payment account from which all payments are made, an interest reserve account and an unfunded reserve account, among others – depending on the needs of the specific transaction). Addi - tionally, these facilities may utilise third-party service providers to act in various capacities, such as collateral agent, custodian, verification agent and/or backup servicer. Facilities may be bilateral or syndicated, and may include multiple tranches of advances and alternative currency advances. These private credit portfolio back leverage facilities benefit Non-Bank Lenders in several
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