By Leon Stephenson and Bronwen Jones, Global Co-chairs of the Fund Finance Group

Welcome to a special FFA 2024 edition of The Glance. The 13th Annual Global Fund Finance Symposium has just ended in Miami. Just 12 months after we discerned a palpable sense of caution across the industry, which of course proved prescient, we now see resilience everywhere we look. We see it in an industry that rallied around its members during the crisis soon after the conference ended last year, and now members gathered again to share their war stories while focusing on the opportunities and challenges that lay ahead. We see resilience in funds embracing new and innovative structures, such as rated note feeders and evergreen funds, to attract and efficiently manage new capital. We see it in lenders augmenting financial product offerings beyond industry-stalwart subscription lines to meet liquidity demand with more NAV, hybrid and GP facilities. We see resilience in the bankers who have landed at new institutions, bringing new entrants to the market to meet unabated demand for liquidity. And we see it among our lawyer colleagues, who met the challenges of a difficult 2023 with the same legal acumen, creativity and collegial professionalism that have been the hallmarks of the practice serving this industry since its inception. Some 2,000 professionals from all sides of the industry attended this year’s conference, including our senior attorneys in the fund finance space. Their summaries of the programs appear below. It was wonderful to see so many of you in Miami over the past few days, and a special thank you to those who attended our reception on Tuesday evening.

Fund finance market updates, ESG and macro developments

By Chris Davis

  • Evolution largely centered on how technologies come into the fund finance space. For example, we’re seeing products that traditionally have not been rated getting ratings, which has allowed new participants to enter the fund finance space.
  • A big question is how regulatory capital treatment issues will play out in the near future.
  • Rate environment continues to have an impact and presents a hurdle for new deals.
  • Influx of capital into the space from insurance companies.
  • New types of vehicles, such as evergreen open-ended funds, which have a mix of both private and liquid assets.
  • Cayman Islands haven’t seen as much activity from insurance companies as might be expected from all the talk.
  • Impact of the crisis
    • Participant stated that from informally polling other subscription line lenders, probably 25% of the global subscription line business disappeared after the crisis last year. Most of that 25% has come back.
    • Spreads widened during the crisis, but stayed consistent even after the crisis ended.
    • Banks need to be more disciplined in the way that they deploy capital.
    • Basel III will impact capital charges and possibly spreads.
    • The crisis was an interesting exercise in determining how liquid these portfolios can be and allowed for external parties to validate deals.
  • ESG
    • Much less talk about ESG after the recent backlash in the U.S.
    • The EU appears to be ahead of the U.S. in this space.
    • Challenge in structuring ESG deals is to not give credit for something that the borrower is already doing. Need to properly tailor targets so that they are appropriately ambitious and not just box-checking exercises.

Legal update

By Jim Lawlor

Panelists on the legal update program recounted their respective experiences under U.S., Luxembourg and Cayman law in efforts to respond with alacrity, accuracy and fairness to the regional banking crisis of 2023. Lenders and transactional counsel in the U.S., well-versed in standard defaulting lender provisions in their documents, nonetheless turned to their regulatory counterparts for an understanding of the FDIC’s overriding authority to delay, or even prevent, actions otherwise available to lead lenders and borrowers under typical credit agreements. For funds and GPs, the crisis presented novel and delicate investor disclosure questions, with accurate and complete responses to inquiries being sought despite a rapidly evolving situation. This while many market participants were responding on a human level to the personal impact of the crisis on friends and colleagues with whom they had worked for years. Guidance generally from the panel is to continue to provide safeguards for borrowers and other lenders against defaulting lenders, but recognize that in a bank failure setting, the regulatory authorities will control the process.

With the sales of loan portfolios that ensued, assignment provisions came into focus and legal attention turned to actions needed to preserve and protect collateral security positions. In the U.S., attention focused on when and whether UCC financing statements should be amended, and raised a few new questions, such as: When a lender is taken over, who is the “secured party of record” to authorize amendments to existing financing statements? In one unique case, a rarely used UCC-5 filing was made to terminate UCCs where the loan in question was repaid (and thus not acquired by a successor bank), but the former bank no longer existed to terminate financing statements still of record. Amendments to existing control agreements were needed to allow a new secured party to be recognized by the depositary institution. In some cases, where deposits remained at an institution, but the loan was transferred, new control agreements were required. Cayman and Lux attorneys were focused on investor notices required in those jurisdictions to establish priority and enforceability of capital call pledges in favor of assignee lenders.