Where credit is due

Credit facilities are often sought out by GPs to help ease the pressure of getting capital from LPs on time to finance the deal – and to prevent the hassle associated with having to return the capital if a deal falls through. However, not all funds are created equal in terms of the ease with which they can access this type of financing.

?We’ve looked at a wide range of limited partnership agreements, and there are those funds that have thought through and want to use this type of facility,? says John Pauciulo, a partner at law firm White and Williams. ?There are others that have significant restrictions on debt – on the type, purpose, usage and proceeds of the debt. That presents more of a challenge.?

The fund’s limited partnership agreement is the first stop on the due diligence circuit for a bank that is evaluating whether or not to provide bridge financing to a fund. ?We look at the LPA of the funds themselves to determine whether, fundamentally, the fund is able to borrow at all,? explains Pauciulo, who advises banks like Citizens Bank on reviewing funds applying for credit facilities.

?At the crux of the matter is, if the LPA prohibits the fund from borrowing, or if the fund cannot pledge unfunded commitments as collateral, then it’s a non-starter for the bank,? asserts Liz Lambert, a senior vice president and head of the private equity banking group at the Philadelphia office of Citizens Bank.

If the fund is able to borrow, then the next step is to examine the restrictions on the types of things that the fund can and can’t do with the financing, says Pauciulo. For example, can they only finance portfolio company investments, or can they finance administrative expenses as well?

Next, the bank will examine the capital call process, in terms of how calls are made and the timing specifications for when LPs send in their money. ?We look at that very closely and try to tailor the loan facility documents to mesh with the terms in the LP documents,? says Pauciulo.

One issue that may arise in structuring the bridge facility is the actual structure of the fund – especially given the proclivity towards creating parallel fund structures to allow for setting up separate funds for UBTI- or ECI-sensitive investors. ?Very often, those [parallel funds] are co-borrowers in the facility, but it is helpful that if they are borrowers, that they are all obligated to pay the debt,? says Pauciulo, adding that it is helpful to have this written into the LPA.

Clearly, certain terms can either facilitate or complicate the process of obtaining a credit facility. To help with the process, Pauciulo and Lambert leave us with the following fund documentation ?wish list? for bridge financing providers.

A ?wish list? of credit-facilitating terms
▪ Expressly permit the fund to finance investments in portfolio companies secured by capital calls

▪ Do not require investor approval or consent for borrowing

▪ Require payment of capital calls within a fixed, short period of time (e.g., 10-15 days)

▪ Do not permit investors to ?excuse? themselves or ?opt out? from responding to a capital call

▪ Impose significant penalties upon investors for failing to respond to a capital call sufficient to deter defaults

▪ In addition to penalties, permit the fund to seek remedies in court

Permit parallel funds to be jointly and severally liable as full co-borrowers

▪ Permit the general partner to pledge its general partnership interests as security for the loan, including the right to deliver notices to investors and enforce remedies