In an effort to improve cost effectiveness and documentation efficiencies in the subscription finance market, participants have developed “umbrella facilities” to aggregate multiple fund borrowers under the same loan documentation. In this Legal Update, we provide an overview of umbrella facilities and the documentation process, explain the benefits of an umbrella facility in the subscription finance market, and discuss other considerations for borrowers and lenders.
What an Umbrella Facility Is
An umbrella facility is a credit facility created by one set of credit documents1 that apply to multiple borrowers with separate borrowing bases. Within the umbrella facility, a separate borrowing base applies to the obligations of different groups of borrowers (“Fund Groups”). Typically, an umbrella facility has a shared aggregate maximum commitment, but because each Fund Group is only permitted to borrow up to its applicable borrowing base, specific Fund Groups may be subject to different sub-limits within the maximum commitment. The relative size of the sub-limits depends on the borrowing base availability and relative utilization needs of the Fund Groups. Therefore, the sub-limits for each specific Fund Group may be adjusted over the life of the umbrella facility.
How an Umbrella Facility Is Documented
Although there is one credit agreement for the umbrella facility, the facility can be structured so that certain terms and conditions within the documentation differ to address particular strategies and/or manage risks specific to a Fund Group rather than across all Fund Groups. For example, specific representations, warranties, covenants, and events of default may apply to only one Fund Group to address differences in organizational documents, investor subscription documents, or structural concerns. In addition, borrowers and their affiliated credit parties provide guarantees and collateral for the obligations of their Fund Group(s), but in some cases, the members of one Fund Group may be unable...