NLC outlines a path forward for sub lines

Sub lines may take a new form in the future, as borrowers struggle to get new lines from banks, according to alternative lender NLC, formerly known as No Limit Capital.

In a new report, the alternative lender calls for partitioning sub lines into tranches, with one taking the traditional form of a revolving credit facility, and the other as a series of term loans up to a predetermined limit.

Private Funds CFO recently reported in its June/July issue that such multiple-tranche loans are already being done, with insurance companies stepping in to provide the term loan portion, with banks providing the pari passu revolving facility.

NLC’s new report shines further detail on how the structures would work.

The fixed-rate portion would include multiple term loans of varying maturities; NCL gives examples of six to 36 months. A GP’s typical approach would be to draw from the facility first and then use term loans for financing acquisitions or to repay their outstanding facility balances, NCL notes.

The firm says there’s limited visibility into the current popularity of this approach, citing the “the private nature” of the fund finance space. But it adds that its own team has worked on more than €6 billion of such structures.

Adding a term loan portion to the sub line package may also lower overall effective borrowing costs, NLC says. That’s because term loans don’t have commitment fees like the facilities and because upfront fees are only paid when the term loans are funded.

Tough market begats opportunity

The turmoil earlier this year in US regional banking was a shock to the fund finance space, NLC notes. The firm estimates that US regional banks made up $200 billion out of a $850 billion fund finance market. A significant portion of the regional banks’ funded activity was concentrated among the prominent banks that failed: Silicon Valley Bank ($41 billion), Signature Bank ($28 billion) and First Republic ($11 billion).

NLC says that the trio’s failure directly affected $80 billion in funded fund finance loans. It estimates that $130 billion in fund finance lending commitments were impacted, as it assumes a 60 percent average utilization rate.

The lender upheaval exacerbated a supply decrease in sub lines that was already under way due to banks dialing back because of internal ceilings on concentration and capital, Private Funds CFO has reported.

NLC predicts that regional banking won’t return to its pre-crisis role in fund finance. It anticipates that regional lenders will face tougher capital treatments on GP deposits, which along with business from funds served as “one of the key attractions” for participating in fund finance.

The shift and the upsides

The market reaction to the supply contraction has been mild due to the weak fundraising climate for GPs, a development that NLC says has “obscured the market’s true imbalance.” This means that the drop has coincided with falling demand from borrowers, the firm explains.

But NLC cautions that the lack of lending capacity will become more acutely felt should fundraising recover. In this case, GPs will either need support from alternative lenders and non-bank lenders, or they will have to take out sub lines that are smaller and more expensive.

Working with these non-bank entities will benefit GPs in multiple ways, NLC says. The upsides include flexibility on loans’ tenors, choices between fixed and floating rates, and working with lenders that won’t be seeking ancillary income like banks have traditionally done, using sub lines as a door-opener in a broader banking relationship.