In net asset value (NAV) facilities, the borrowing capacity typically adjusts to reflect changes to the value of the underlying investment portfolio, and borrowers face the risk of potential borrowing base deficiencies or minimum net asset value/loan-to-value covenant breaches if the value of such assets sharply drops. These risks can become particularly pronounced during a financial downturn or in the event of a bankruptcy or other credit event relating to a borrower or an underlying portfolio asset. In either circumstance, the automatic stay can inhibit a borrower’s access to distribution proceeds, affecting its liquidity and ability to meet financial obligations. In this Legal Update, we discuss the purpose of the automatic stay, share options for relief from the stay, and offer recommendations for navigating the complications that the automatic stay can create for NAV facility lenders.

Background: Overview of Bankruptcy Proceedings and the Automatic Stay

NAV facilities allow investment funds to manage cash flow fluctuations and meet investor redemptions without selling underlying assets, which enables funds with illiquid investments to maintain their investment strategies and avoid forced liquidations during periods of repayment pressure.

Financial institutions may also use NAV facilities to optimize capital usage and enhance liquidity management. By leveraging their investment portfolios, institutions can access additional funding at favorable terms, enabling them to deploy capital more efficiently while maintaining diversified asset holdings.

In NAV facilities, the borrowing capacity typically adjusts to reflect changes to the value of the underlying investment portfolio, but borrowers face the risk of potential mandatory repayments if the value of pledged assets sharply drops. These risks become particularly pronounced in the event of significant financial downturns. In such circumstances, it is possible that either the borrower or certain of its underlying investments could become the subject of bankruptcy proceedings.

As a general rule, US bankruptcy...