As the subscription credit facility market continues to evolve, temporary increase tranches have become increasingly common because they enable funds to quickly adjust the facility size in response to changing investment opportunities and capital requirements. While temporary increase tranches offer several benefits, they also introduce complexities in voting rights, consent processes, and payment allocations that require careful negotiation and documentation.

The Mechanics of Temporary Increase Tranches

Temporary increase tranches may complement or substitute traditional permanent increase options. When this option is included in a subscription credit facility, the temporary increase option usually allows borrowers to request an increase in the maximum commitment for a brief period, typically 90 days or less and generally less than a year. Loan agreements for temporary increase tranches may specify that the increases are available on either a committed or uncommitted basis.

Loans under a temporary increase are usually structured as separate tranches from those under the permanent facility, with each temporary increase tranche distinct from others. These tranches are renewed or extended independently. Because there is typically not a requirement to make pro rata draws across the permanent and temporary tranches, borrowers can choose the specific tranche – permanent or temporary – they wish to access for each drawdown request.

The obligations associated with temporary increase tranches are considered part of the overall facility’s obligations, secured by the same collateral and ranking pari passu with all other loans under the facility in terms of security and priority. This parity extends to foreclosure scenarios, where obligations under both permanent and temporary tranches share equal priority for repayment from collateral accounts, investor capital contributions, and any other secured assets.
For loan availability calculations relevant to future draws, the principal obligations of both permanent and temporary increase tranches are combined. While the terms of temporary increase loans generally mirror...