Proskauer survey sheds light on NAV terms

Creator of the survey says the novel practice of back-levering deals with NAV has already spread to even the lower mid-market.

An informal survey conducted by law firm Proskauer shows the terms some of the big NAV lenders are offering, providing some insight into the obscure, but increasingly popular, asset class.

The survey was conducted with a handful of some of the biggest balance sheet, non-bank lenders in the market, Proskauer partner and former banker Matt Kerfoot told affiliate title Private Funds CFO.

Because of its limited respondent pool, some of the data may be skewed, Kerfoot warned. But the relatively small number of lenders in the market and the quality of the lenders surveyed means the data does represent a significant part of the market. “The responses are generally representative of where we think the market is,” said Kerfoot.

NAV loans have rocketed in popularity, as reported by Private Debt Investor in February, though there is much more demand than supply, in large part because the market is relatively nascent. But with the leveraged buyout market in turmoil and the subscription credit line market hobbled by various forces, borrowers and lenders are finding creative ways to use NAV to keep business going, as reported by Private Funds CFO in June.

“It was largely the insolvencies [of three regional banks in March and May] that were a catalyst for a reconsideration of what the market looks like, and getting a sense of what the characteristics of the broader NAV loan market are,” Kerfoot said.

Among the new approaches are back-levering all or partially cash acquisitions with NAV loans. At the time of Private Funds CFO‘s June report describing this technique, it was primarily mega-cap sponsors taking part in these transactions.

But Kerfoot said the practice has already spread. “We’re seeing these loans used as back-leverage not just for mega-cap sponsors taking out $1 billion, but even for lower mid-market sponsors taking out as little as $10 million.”

That’s in part driven by pricing, at least for the big players, he added. “Pricing for mega-cap sponsors for low loan-to-value NAV loans has been well inside traditional LBO pricing.”

Perhaps unsurprisingly, Proskauer’s survey indicates that most of the borrowers in the market (58 percent) are buyout firms; and 65 percent of the closing LTVs for respondents’ NAV loan portfolios have between 10 and 25 percent LTVs.

Average pricing for such deals is 740 basis points over benchmark (SOFR, in the US) – more or less in line with expectations.

But Kerfoot was surprised by the fact that 19 percent of closing LTVs were reported to be above 25 percent – the second most common response regarding closing LTVs.

“We didn’t think there would be as many deals above an LTV of 25 percent for concentrated NAV loans,” he said. “We typically see equity subordination of up to even 90 percent.

“It may be part of a surprising trend, but it may also just be reflective of the strategies of the larger lenders, greater risk being priced into the loans, or some intangible quality of the borrower or underlying assets that make them more comfortable with the higher risk,” he added.

For such high-LTV deals, average pricing, even more surprisingly, was below that of deals with LTVs between 25 and 50 percent. Deals above 50 percent LTV were priced at an average of 800bps, while those between 25 and 50 percent were priced at an average of 883bps. That may be for similar reasons to those Kerfoot gave for the surprising number of 25 percent-plus deals, such as “intangible” qualities of the borrowers. The pricing data shown in the survey reflects only the buyout market, Kerfoot added.

Fund structure preferences

Yet another surprise response from lenders was that 56 percent of their NAV loans were structured at the favoured fund level. “Loans at the fund level can raise meaningful tax issues, so more often than not the loan would be put into a corporate blocker in a holdco below the fund, and above the portfolio assets,” Kerfoot explained. “Then the NAV of the assets is conveyed to the lender via a fund-level guaranty or equity commitment letter.”

But some lenders may see such a fund-level guarantee as qualifying the loan itself as at the fund level. Nineteen percent of loan respondents were made to the GP or management company, while another 19 percent were made to the holdco or portfolio company asset or assets with a fund guarantee. Such loans comprise the vast majority of those Proskauer has been involved with, Kerfoot says.

“That fund-level guarantee allows the lender to observe and control the distribution waterfall process”, giving the lender more confidence that they are keeping the appropriate position in the capital stack.

Only 6 percent of deals were structured as preferred equity.

Most common features

The survey also noted how common certain lender commitment sizes were: $100 million to $200 million (30 percent); $25 million and below (21 percent); $50 million to $100 million (17 percent); and $25 million to $50 million (16 percent).

“While certain respondents may have participated in the notable $1 billion-plus NAV financing earlier this year, individual commitment sizes in that facility may have been significantly smaller,” the survey noted. Kerfoot would not disclose the name of that borrower.

Loan maturities were most often in the four- to five-year range, at 57 percent of the respondents’ pools. Those with one- to three-year tenors were second-most common, at 36 percent.

Original issue discounts – the upfront fees paid by borrowers that effectively lower the value of the principal borrowed – were most commonly 1.5-2 percent (53 percent of respondents’ loans), with 39 percent of loans having OIDs of 1-1.5 percent.

Most deals use a mix of assets as credit support. But cash accounts represent the favourite credit support type, with 72 percent of respondents saying they required them. Asset pledges were second-most popular (68 percent), followed by fund guarantees (47 percent).