The structure of a NAV loan agreement is centered around several core financial and legal components that define the borrowing capacity and risk profile of the facility.
Key terms typically included in these agreements are:
- Borrowing Base: This is the primary component of the facility, derived from the aggregate net asset value (NAV) of the fund’s portfolio companies. It is periodically revalued based on market conditions and the financial performance of the underlying assets.
- Advance Rate: Lenders apply this percentage to the borrowing base to determine the maximum funds available. For general purposes, rates range from 10% to 20%, though follow-on acquisition facilities may see rates between 20% and 30%.
- Interest Mechanics: These are typically structured as floating rates, tied to a benchmark rate plus a specified margin that reflects the risk profile of the portfolio.
- Covenant Package: Agreements include financial guardrails such as Loan-to-Value (LTV) ratios, minimum diversification requirements, and concentration limits to protect the lender.
- Cross-Collateralization and Defaults: Provisions that may link multiple portfolio assets. Expert guidance suggests negotiating these triggers carefully to prevent a default in one holding from impacting the entire fund.
- Tenor: NAV facilities are generally longer-dated than subscription lines, with typical terms lasting between 3 and 5 years.
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