The market for subscription-backed credit facilities, also known as “capital call” or “capital commitment” facilities (“Subscription Facilities”), was recently unsettled by reports that an international private equity fund had allegedly released its investors’ capital commitment obligations in violation of covenants under its Subscription Facility, potentially leaving the Subscription Facility lender exposed without sufficient collateral coverage with respect to the loan amounts outstanding. While most lenders have always been aware of this risk, many market participants have re-focused their attention on this issue and are now looking to better understand a lender’s protections against a fund-borrower (the “Fund”) and its investors following the unauthorized release of the investors’ obligations to fund their capital commitments to the Fund.
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