Implementation of United Nations Security Council Sanctions by the Hong Kong Authorities

The Hong Kong government, via Acting Secretary for Commerce and Economic Development Dr Bernard Chan and in response to a query from lawmaker, the Hon. Kenneth Leung, issued a press release on 23 January 2019, publishing figures on the number of sanctions investigations and related enforcement actions undertaken by the Hong Kong government on potential breaches of United Nations Security Council sanctions over the past five years, as well as detailing staffing levels dedicated to such investigations.

Fund Finance Market Review

Looking forward in 2019, we are optimistic that the market for fund financing remains robust. In 2018, Mayer Brown noted a significant uptick in the number of traditional subscription credit facility (each, a “Subscription Facility”) closings and a record number of alternative fund financings such as net asset value facilities, hybrid facilities, secondaries transactions, management fee facilities and partner loans (together with Subscription Facilities, “Facilities”). Counterintuitively, this occurred even though fundraising in 2018 did not exceed the prior year’s numbers and in light of the recently publicized events relating to the insolvency proceedings of a Cayman Island domiciled fund that was sponsored by a Middle Eastern sponsor. In general, given investor (“Investor”) expectations for continued investment and the reaction of both private equity and other investment funds (each, a “Fund”) and lenders, we continue our optimism for 2019 with respect to both the Facility market and that of the Fund asset class. Below, we expand our views on the state of the fund finance market as well as current trends likely to be relevant in 2019.

High-Yield Bonds in Asia - What Every Issuer Needs to Know (Part 2: General Principles of a High-Yield Covenant Package)

High-yield bonds are complex debt instruments with tailored covenant packages. Understanding how these covenants work and how to tailor a covenant package is essential to ensuring the issuance of cost-effective high-yield debt that does not restrict the ability to expand a growing business. 

Statutory Protections against the Unauthorized Release of Capital Commitments in a Subscription Credit Facility

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.

Statutory Enforcement of Forms of Credit Support in Fund Finance

Private investment funds (“Funds”) employ a variety of financing structures to improve liquidity and/or obtain leverage, and lenders similarly rely on a variety of collateral and credit support packages for repayment in connection therewith.  Three types of credit support commonly used in the fund finance market are (i) the unfunded equity capital commitments of limited partners of a Fund (“Capital Commitments”), (ii) a guaranty (“Guaranty”) and (iii) an equity commitment letter (“ECL”).  In the event a Fund and/or a lender must attempt to monetize any of these forms of credit support for purposes of repaying a credit facility, the unique characteristics of each will dictate how the parties can effectively realize the applicable credit support. This article will discuss the enforcement of a Capital Commitment, Guaranty or ECL by the applicable party in connection with a credit facility.