The growth of the subscription credit facility market has resulted in many lenders holding significant exposure to the same investors across their entire portfolio.  Many lenders are required to track their aggregate overall exposure to these investors in addition to tracking aggregate exposure to sponsors.  To mitigate this concentration risk, many lenders are exploring adopting “cross-exclusion events” across their subscription credit facility portfolio.  A cross-exclusion event is like a typical borrowing base exclusion event in a standard subscription credit facility, but the exclusion event is not “fund”- or “credit facility”-specific (much like a cross-default).  Rather, this cross-exclusion approach resolves a concern that lenders are contractually liable to lend against an investor’s capital commitment in Facility A even though they know that this investor is subject to an exclusion event in Facility B.

Approaches We Have Seen Proposed

We have seen two approaches to cross-exclusion events proposed:

(1) A “sponsor-specific” exclusion event. Under this approach, an investor or its affiliate would be excluded from the borrowing base in Facility A if they were subject to or experienced certain disqualifying events for that same sponsor in Facility B (assuming the exclusion events in both facilities were substantially similar).  For example, if the same manager has sponsored two funds (Fund I in Facility A and Fund II in Facility B), any repeat investor that failed to make a capital contribution to Fund I would be excluded from Fund II’s borrowing base.  This seems logical—if an investor is failing to fund its capital commitment to a prior vintage of the same sponsor, lenders should be entitled to stop lending against that investor’s capital commitment in other facilities.  Note that the exclusion event would occur under Fund II in Facility B even if the lender didn’t advance or participate in the subscription credit facility to Fund I...