Executive Summary
A common hurdle in Net Asset Value (NAV) credit facilities is the presence of transfer restrictions on equity interests. In this Legal Update, we explain how these transfer restrictions operate in NAV credit facilities, their practical implications, and potential solutions for navigating their complexities.
Background: Transfer Restrictions Limit Pledges of Equity
Transfer-restriction provisions purport to prohibit—or require—consent for any transfer or pledge of an equity interest in a portfolio company, or treat even an indirect change in control or indirect pledge of an equity interest as a restricted transfer, including scenarios where the fund pledges its interests in holding vehicles or an aggregator vehicle, which may impact the borrower’s pledge of equity interests as collateral.
In practical terms, if a lender attempts to take a security interest in such equity without the requisite consent, the pledge may violate the restriction. Upon default under the NAV facility, the lender may be required to obtain additional consents to realize the expected value of that collateral, effectively becoming blocked from foreclosing or selling the interest due to the restriction or be limited to a pledge of the economic interests relating to such equity. In short, asset-level transfer restrictions can place practical limitations on the collateral package available to a lender.
Diligence Challenges in Large Collateral Pools
Although it would be preferable for NAV lenders to review all applicable documents to determine the scope of transfer restrictions and the consequences of disregarding such restrictions, doing so may be impractical. For deals with many underlying investments, reviewing all applicable documentation for transfer restrictions can be time-consuming and costly. Among other things, the relevant investment documents in a particular deal are not necessarily uniform, so there may be inconsistent limitations on equity transfers and unique consequences to such transfers within the documents. To diligence...