Sub line market upheaval clips tenors: Haynes Boone

Tenors for subscription lines have shrunk over the past year due to market and macro headwinds, according to findings from Haynes Boone.

The law firm says that the average initial tenor in H1 2023 was around 18 months, down from more than 24 months in H1 2022.

The findings attribute the drop to five factors – including some familiar ones. Among these are tighter bank capital requirements and favorable treatment of tenors under one year; the exits of sub line lenders – both due to the regional banking crisis earlier this year but also to a longer trend of banks pulling back from the market; and rising interest rates.

Other drivers cited are a slowdown in fundraising that prompted lenders to conduct borrower re-evaluations when they wrap up their fundraising targets, along with new entrants taking cautious approaches while they familiarize themselves with the sub line market.

Data for the findings comes from deals that Haynes Boone has worked on, says Lindsey Hughes, a counsel at the firm who co-authored them.

Haynes Boone primarily works with private equity and real estate funds, says partner and co-author Aleksandra Kopec. The research focuses on US funds, she says.

The findings also show that the proportion of committed extension requests from borrowers – those that don’t require consent from lenders, provided certain conditions are met, such as not defaulting – plunged from about 46 percent in H1 2022 to only around 23 percent for H1 this year. The proportion for H2 2022 was just under 28 percent.

In contrast, Haynes Boone found that uncommitted extension requests – those requiring lender permission – gained share.

Going with an uncommitted request serves as a hedge for borrowers against uncertainty happening now, Kopec notes.

She says the shift toward uncommitted ones doesn’t mean that relationships between borrowers and lenders are fraying. Rather, it means taking another look at agreements.

“It’s more like, ‘we really need to kind of reassess,’ and most of the time it’s reassessing together,” Kopec adds.

However, some sponsors are still getting longer-term sub lines. Kopec says that these tend to go to larger GPs and are used for refinancings.

And she notes that GPs that are having difficulty in getting longer-tenor sub lines can gain access, with a catch: pay more for them.

Newer sub line lenders are incentivized to offer these higher-priced sub lines as part of their market forays, Kopec says.

That said, the pricing difference isn’t significantly higher – Kopec places the figure in the area of 50-100 basis points.