A good time to focus – August 2022 | Issue 190 – Focus on debt limits | Cadwalader, Wickersham & Taft LLP

A common feature included in credit agreements is a limitation on the amount of a single investor’s unfunded capital commitment (or aggregate unfunded capital commitments of a class of investors) that can be included in the calculation of the borrowing base on any determination date. Such a feature serves to protect a lender against too much exposure to a single investor (or class of investors) and better ensures that the borrowing base is made up of a diversified pool of unfunded capital commitments. In the early stages of fundraising, the investor pool may be limited in number and made up largely of a short list of reference investors. The application of a concentration limit can significantly reduce the calculation of the borrowing base in these circumstances. Thus, borrowers often request that enforcement of concentration limits begin on a pre-determined date after the facility closes or, in more lenient circumstances, after the borrower has completed fundraising. Depending on the investor mix at closing and depending on the expected future investors in the borrower, a lender may be willing to accommodate this request. However, this compromise has led some lenders to take a closer look at the debt limits to be imposed on a borrower during “focus leave”.

The indebtedness limitation clause in a credit agreement often includes a cross-reference to the indebtedness requirements and limitations set forth in the applicable partnership agreement. These limits often set the maximum amount of debt a borrower can take on as a percentage of total capital commitments. Although this percentage may vary from one corporate agreement to another, it often applies to any debt incurred under an underwriting credit facility.

In exchange for a temporary waiver of concentration limits, we have seen lenders impose a stricter limit on leverage than what is otherwise provided for in the partnership agreement during the period when concentration limits are not in effect. not apply. The rationale for imposing such a limitation on debt is that the lender has greater exposure to a single investor based on that investor’s uncalled capital commitment comprising a greater portion of the equity base. loan that the lender would not otherwise prefer. Therefore, the lender wants to limit the overall amount of debt the borrower can take on until the investor pool is more diversified and concentration limits are enforced. The extent of this limitation varies from transaction to transaction, but remains a consideration at the structuring stage where the investor base is expected to be highly concentrated for some time after closing.

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