Structuring NAV Financing for Private Funds: LTV Covenants, Multitier Transactions, Intercreditor Issues

NAV loans are loans supported by the value of interests a private equity fund holds in its portfolio companies or other funds. The critical risk metric is the LTV ratio; for NAV loans to remain out of default, LTV ratios need to remain below certain pre-agreed thresholds. Breaching the LTV threshold can trigger remedies, including mandatory prepayment of the facility or even foreclosure. Determination of asset values and adjustments to values over time are thus critical aspects of NAV loan underwriting and documentation.

The NAV borrower structure can result in different approaches to perfection of the lender's security interest in the loan collateral. If an SPV holding company is formed, UCC financing statements will be filed against the holding company and borrowing entities. Deposit or securities accounts will be subject to control agreements in favor of the lender. If the borrower is a limited partnership, lenders will require that its general partner pledge its interest.

Lenders have become more comfortable with second liens on loan collateral, and in some cases, lenders may have senior or subordinate positions in different assets of the borrower. They should enter into an intercreditor agreement that provides for who may declare defaults and exercise rights in the shared collateral, amend loan documents, or grant waivers, as well as provide for the distribution of payments and proceeds of collateral.

Other variations on standard NAV facilities have emerged. Hybrid fund finance facilities combine financing of the investors' uncalled capital commitments with financing the fund's underlying assets.

Listen as our authoritative panel discusses the nuances of NAV financing, including first/second lien and other structural variations and intercreditor issues to consider.