Subscription Finance Loan Agreement Series Part 11: Prepayments and Mandatory / Voluntary Cancellations
A scheme for a combination of events that require a mandatory prepayment and options for borrowers to make voluntary prepayments, as well as mandatory or voluntary cancellations, are a common feature of all AML-based loan documents. , and a capital subscription / call facility is no exception. Considerations regarding the circumstances under which (and how much and under what notice periods) a voluntary prepayment or cancellation may be made are similar in the context of an underwriting / capital call facility to any other loan document. However, those relating to prepayments and compulsory cancellations present certain characteristics and nuances more specific to financing by subscription / call for capital. In this article, we’ll cover that and provide a brief summary of the most common features of voluntary prepayment and cancellation provisions.
As a backdrop, here’s a quick reminder of why these provisions are included in the first place. Prepayment / squeeze-out events are generally intended to address circumstances in which events have occurred with respect to the borrower of the fund that significantly change the lender‘s view of credit but are, in fact, , “no fault” type events. In other words, these are not events that the borrower of the fund itself has caused or allowed to happen. In certain types of facilities (although generally not in subscription / capital call facilities) they may also be there to make fund transfers. In contrast, early repayment or voluntary cancellation options are there primarily to help the fund borrower adjust the outstanding debt or commitments available under the facility to changes in the borrower’s capacity. of the fund to repay the facility or its need for commitments from the facility.
Thus, in a subscription / capital call facility, we often see typical “compulsory prepayment” provisions common to a certain number of types of facilities. There will always be a mandatory prepayment requirement in case of illegality (and this will be almost identical to mandatory prepayment triggers at any other establishment). Mandatory “change of control” prepayment events are also pretty much universal. In equity subscription / call facilities, these tend to be triggered by a mixture of (a) changes in the ownership of the general partner or manager and (b) more directly, with the general partner or manager ceasing to be the manager. general partner or the manager of the borrower of the relevant fund.
After that, the options in terms of mandatory prepayment will vary depending on the particular credit criteria and the constitution of the fund. It was (and sometimes still is) the case that the occurrence of a “key person” event (that is to say, the departure of one or more of the “key” persons of a fund as defined in its LPA), or a failure to resolve this event within a certain period, would trigger a compulsory advance payment. Other mandatory prepayment events may include the end of an investment period (if this is likely to have an impact on funding or security) and, in the case of an amortization facility, a obligation to repay up to revised facility limits as amortization begins. With a nod to the circumstances that would have surrounded the Abraaj case, lenders may also consider including other events in the mandatory prepayment provisions.
Often, it will be a matter of negotiating whether some (or all of the above) additional Compulsory Prepayment Triggers (if included) are left as “Compulsory Prepayment” events or are moved to Compulsory Prepayment events. fault. In making decisions about this, it should always be borne in mind that the underlying rationale for most “mandatory prepayment” events is that they do not themselves involve a “default” of the debtor. funds or other debtors.
Turning now to voluntary prepayments and cancellation, the terms of the subscription / capital call facilities thereon are similar in many ways to those of any other AML-based facility. There will be provisions for voluntary prepayment (and generally cancellation) in whole or in part on notice (and in minimum and multiple amounts) on a pro rata basis for all lenders. In addition, it will be possible to prepay or cancel facilities or commitments of an individual lender if tax surcharges or tax indemnity payments are required by that lender, or if the fund is required to make payments. increased costs to that lender. When the facilities are revolving facilities (as is often the case in the underwriting / capital call world), a specific prepayment or cancellation option may also be included for “defaulting” lenders.
A few final comments. In subscription / capital call facilities, the line between what should be a “mandatory prepayment / cancellation” event and what should be a “default event” can be blurred, especially with regard to the different prepayment options. / additional mandatory cancellation. For voluntary prepayments / cancellations, it should be considered how often these options are likely to be exercised and under what circumstances. Capital subscription / call facilities are generally made available before investments are made, so prepayment possibilities may be limited. Additionally, while the facilities are revolving facilities, the funds will generally want to ensure that a voluntary prepayment can be re-borrowed (so that it does not permanently cancel the portion of the facility repaid). And, finally, given that certain subscription / capital call facilities are offered in the market without commitment, in these cases the “pre-cancellation” option may not be an option that the fund has a particular incentive to do. exercise, and it is always good to keep the option.