United States: December Fund Financing Market Update
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The active underlying trading environment combined with the LIBOR transition deadline of December 31, making November the busiest month in Cadwalader Fund Finance history. We are convinced that this has been the case across the market, for virtually all institutions and all regions. Below are our short-term market observations as we look at the strip at the finish line.
- The demand environment has not only remained high, but appears to be picking up in the fourth quarter. Virtually all of the demand metrics, including new cases opened, accumulated hours and potential hours, all set records in November.
- The year-to-date average price for new creations on the US subscription has fallen below 200 basis points against LIBOR. The trend is towards a gradual tightening of margins. Quarterly lows are falling much faster than averages, which are down less than 15bp since the start of the year. We believe the high demand environment will keep pace with the gradual tightening for the foreseeable future.
- Market trends are even better measured on the basis of LIBOR. SOFR is rapidly gaining ground, but it will make future data noisy because of approach inconsistencies (at least during this transition period). Some operations price SOFR loans at a larger margin than LIBOR (g., 10 basis points wider applicable margin applied to SOFR loans). Other transactions use the same margin applicable for LIBOR and SOFR as well as the standard static spread adjustments applied to SOFR.
- Credit adjustment spreads between LIBOR and the new RFRS (SOFR, SONIA, etc.) are increasingly being issued.
- There is an increased focus on revocable capital (including the distinction with revocable distributions) during the renewal season, as funds seek to extend the life of the fund and leverage portfolio investments even after the expiration of the investment period.
- We are seeing an increase in requests for QB junctions (reminiscent of the early days of COVID) to provide liquidity to portfolio companies for acquisitions and PIPES.
- A number of new GP facilities are due to be closed by the end of the year to fund GP liabilities, as GPs take advantage of low interest rates and turbulent stock markets.
- BDC borrowing facilities and other more permanent capital-type vehicles are increasing as a percentage of the package.
- Unusual as bonus season approaches, we continue to see dramatic changes in our relationships with our clients (and in law firms!).
We are extremely grateful for the continued support from our customers and their sponsors throughout 2021, another great year for our industry. Have a great weekend!
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