Calling all commitments – capital call security over debt commitments from a Cayman Islands perspective

From a Cayman Islands perspective, capital call or subscription line credit facilities generally follow a well-trodden path. This path allows the Cayman Islands aspects of such deals to be agreed and completed efficiently.
 

A new market trend in the subscription financing space, which Walkers has been at the forefront of, has raised some interesting considerations from a Cayman Islands perspective. This trend features private equity funds formed by way of exempted limited partnerships with investors having made capital commitments which are comprised not only of the traditional equity commitments to the fund, but also debt commitments (sometimes comprising as much as 90% of the overall commitment). Walkers' fund formation team has formed several such funds, which cater to insurance-related investors and seek to address the unique regulatory requirements which apply to such investors and their investment strategies.

The fund documentation itself does not typically need to deviate significantly from the customary documentation that is currently utilised, but some important considerations need to be borne in mind during the drafting stage.
 

As would be expected, a limited partner enters into a subscription agreement in a relatively standard form pursuant to which it agrees to make a capital commitment in the usual manner, and acknowledges that a percentage of its capital commitment will be designated as an equity commitment and the remaining percentage as a debt commitment. The debt commitment is documented in the LPA and is further evidenced by a form of promissory note scheduled to the LPA which would be used to 'call capital' from the investor pursuant to the debt commitment.

During the fund formation stage, it is important for Cayman Islands counsel to consider and include provisions in the LPA to address potential concerns that lenders to the fund may have, which should pre-empt and avoid any issues that could arise during the negotiation of a capital call financing. Such provisions include:

  • wide powers for the fund to incur indebtedness and grant security, including wide powers to provide all forms of credit support in respect of indebtedness of another fund in the group;
  • a restriction on the limited partner accelerating or calling for repayment of its debt commitment where third party indebtedness of the fund (i.e. pursuant to a subscription facility) is outstanding;
  • limited recourse language to the effect that the limited partner's sole recourse is to the assets of the fund; and
  • non-petition language preventing the limited partner from seeking to wind up the fund (or commencing other insolvency procedures) at a time where third party indebtedness of the fund is outstanding.
Walkers continues to see these types of deals develop and become more commonplace and looks forward to continuing market development resulting in unique and innovative types of structures designed to meet the needs of investors.