Executive Summary

Cash control provisions are critical features of any subscription credit facility, safeguarding lenders’ primary repayment sources while also potentially impacting the Fund’s cash management operations. Lenders and borrowers should therefore understand the implications of Cash Control Events and carefully negotiate the scope of these provisions in subscription credit facility documentation. This Legal Update explains the role of Cash Control Events, the common scenarios in which they occur, and the consequences of a Cash Control Event.

Background

The underwritten source for repayment for subscription credit facilities is the capital contributions made from time to time by the Fund’s investors. Subscription credit facility documentation requires that such contributions be funded into a collateral account over which the administrative agent has a perfected first-priority lien. While Funds have flexibility to manage cash within the collateral account during the ordinary course of business, parties to subscription credit facilities frequently negotiate specific circumstances – commonly referred to as “Cash Control Events” – upon which such flexibility is limited.

A Cash Control Event generally occurs in three scenarios:

(1) an event of default has occurred and is continuing;
(2) a potential default (i.e., a breach still subject to a grace period) has occurred and is continuing; or
(3) a mandatory prepayment has been triggered (i.e., a borrowing base deficiency).

Upon a Cash Control Event, the Fund’s ability to withdraw cash is suspended and the administrative agent is entitled to exercise its control over the collateral account.

What You Need to Know

The Difference Between an Event of Default and a Cash Control Event

Cash Control Events provide the administrative agent with the ability to take exclusive control over capital contributions in the collateral account, ensuring such funds are available for repayment of facility obligations if necessary. While events of default have broader consequences, Cash...