USA – NEW YORK Trends and Developments Contributed by: Sheel Patel, Perry Hicks, Linda Boss, Jason Friedman and Ben Snyder, Mayer Brown LLP
ways. These facilities increase a Non-Bank Lender’s lending capacity by upstreaming loan proceeds received by an SPV Borrower under a Loan Agreement. The SPV Borrower is not upstreaming loan proceeds as a dividend, but uses the loan proceeds to purchase the Loan Assets from the Non-Bank Lender. The Non-Bank Lender can then use the proceeds from such Loan Asset sale to acquire or origi - nate additional Loan Assets without calling on equity. By using loan proceeds in lieu of equity, the Non-Bank Lender also reduces its cost of capital, as interest under the Loan Agreement is expected to be less expensive than the target return to the Non-Bank Lender’s equityholders. In addition, using the SPV structure isolates the Loan Assets in the SPV Borrower and avoids introducing operational or financial risk issues (including a Non-Bank Lender bankruptcy) that a Lender might have if it were lending directly to the Non-Bank Lender against the same Loan Assets. This isolation of assets and limitation of risks increases the leverage a Non-Bank Lender may receive from Lenders with respect to any given Loan Asset, may lower the interest rate that the SPV Borrower pays and may ultimately lower the Non-Bank Lender’s cost of funds. By using these private credit financing strategies, a Non-Bank Lender is able to optimise its capital structure and to continue to expand its opera - tions in the private credit market. Key characteristics of a private credit A key component of most structured financing products is the use of a bankruptcy-remote enti - ty. Private credit portfolio back leverage financ - ings are no exception to that rule. “bankruptcy remote” entity is one that through its organisa - tional documents and contractual agreements is subject to certain obligations that minimise the portfolio back leverage facility Bankruptcy remote SPV borrower
risk of the entity being subject to a voluntary or involuntary bankruptcy proceeding. The organi - sational documents and contractual undertak - ings of an SPV Borrower in these transactions would typically include the following traditional characteristics to evidence that the entity is bankruptcy-remote: • The SPV Borrower will have a limited pur - pose, tailored to the activities necessary to effect the specific transaction for which it was formed. • The SPV Borrower will generally be subject to a requirement to maintain an independent director whose vote would be required for the applicable entity to file a voluntary bankruptcy petition. • The SPV Borrower will be subject to sepa - rateness covenant obligations including, among other items, to: (i) maintain its own books and records separate from any other entity, (ii) maintain its accounts separate from other entities, (iii) not commingle assets, (iv) maintain separate financial statements, and (v) conduct business in its own name, among other traditional indicators of separateness. The goal of these bankruptcy-remote require - ments is to limit the potential that the SPV Borrower will become subject to bankruptcy proceedings, which would introduce mate - rial limitations and delays on a creditor to take enforcement actions against a borrower or the assets against which it extended credit. Loan asset eligibility criteria Given that a Lender’s credit recourse in a pri - vate credit ABL financing is limited solely to the assets of the SPV Borrower, it is not surprising that the Loan Agreements in such transactions typically set forth specific criteria that the Loan Assets are required to satisfy to be acquired by
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