Structuring and Documenting Subscription Facilities

Description

Subscription facilities serve various purposes, from financing acquisitions to giving a fund the flexibility to issue letters of credit or enter into hedging transactions. The prevalence of adoption of subscription facilities by funds demonstrates their benefits, and practitioners who structure subscription facilities with balanced consideration for the competing interests of sponsors, investors, and lenders are most likely to achieve a win-win execution of the transaction.

A lender will typically require that investors be bound by certain "bankable" provisions, most commonly contained in the fund's governing documents, but in some limited instances "investor letters" are still required. The lender will ultimately want investors to, among other things, acknowledge the lender's right to make capital calls and waive any setoff rights, counterclaim, or other defenses and to fund capital contributions to a deposit or securities account pledged to the lender as collateral.

One of the most important components of a subscription facility is the "borrowing base" which is a calculation of available capital commitments, multiplied by the advance rate and dictates how much a fund is able to borrow. Other key representations and covenants likewise relate to the uncalled investor commitments, and terms under which they can be transferred, modified or reduced, as well as the ability of the borrower to incur additional debt, pledge collateral in support, or make distributions to limited partners.

For both lenders and fund borrowers, it is important to understand the implications of UCC Article 9 and 8 on security interests in subscription line collateral and the role of non-UCC remedies in fund finance structures.