At A Glance

The rise of the direct lending market has led to a dramatic rise in supporting liquidity strategies to optimize the market. These strategies include the use of financings to provide market participants with leverage and/or supplemental liquidity to support their direct lending activities. These financing go by various names, including private credit ABL, SPV drop-down, CLO-lite, and CLO warehouse, among others, but have a common general structure that draws from traditional secured lending and structured financing transactions.  In this Legal Update, our team addresses some of the basic characteristics, structural considerations and complexities that are present in these facilities.

Direct lending involves the extension of credit by nonbank institutions and Insurance Companies to private funds and other borrowers generally in the middle market.  Over the past twenty years, the direct lending market has experienced dramatic growth.  Because middle-market loans are generally not traded on the secondary market, the strong growth in direct lending has created a commensurate demand for strategies to optimize the capital structure of the nonbank participants in the market.  Strategies that provide leverage or additional liquidity, such as private credit financings, are in high demand by these market participants and that demand is projected to continue to grow with the direct lending market.  This Legal Update addresses some of the basic characteristics, structural global considerations, and complexities that are present in these facilities.

Benefits and Basic Structure

Private credit portfolio back leverage, also commonly referred to by other names, including SPV drop-down facilities, CLO warehouse, CLO-lite, ABL CLO facilities or simply back leverage, among others, is meant to provide financing to direct lenders.  While the nomenclature is not consistent, the benefits and the financing structures are.  A typical private credit portfolio back leverage financing facility will have the following structure.  The direct lender (the...