Letters to Investors: Key Provisions | Cadwalader, Wickersham & Taft LLP
Although the practice of the market has moved away from obtaining letters to investors (“letters to investors”) for many subscription-based credit facilities (“facility”), letters to investors continue to be of interest. effective option to provide additional credit support for certain types of facilities with single managed accounts and challenging lender provisions in cover letters. One reason for this change is that limited partnership agreements (the “Partnership Agreements”) have become much more lender-friendly, provide stronger secured facility provisions, and include many of the important provisions of the letter. to investors. Letters to Investors have always supplemented standard loan and guarantee documents and fund formation documents to provide direct assurances from a limited partner (“fund investor”) to a lender whom the fund investor fully respects. its capital commitment to a fund (“fund”). In this article, we will explore some of the main provisions contained in letters to investors and their importance to a lender in an underwriting facility.
An investor letter is an acknowledgment and agreement entered into by an investor for the sole purpose and benefit of a lender providing credit to a fund in a facility. The letter to the investor provides for certain statements, acknowledgments and undertakings by the fund investor to a lender that the fund investor will honor his capital commitment to the fund and make capital contributions when called upon by the fund. funds to repay any outstanding credit extensions made by that lender. at the bottom. The lender will rely on these declarations, acknowledgments and commitments to grant credit to the Fund. An investor letter is generally appropriate and required by a lender in a facility when there is (a) a single managed fund investor, (b) a public institution or body such as a public pension scheme. the absence of a statutory waiver, (c) a capital commitment concentration that exceeds a certain percentage of the Fund’s overall commitment (generally between 25% and 35%), or (d) a covering letter from the investor of the Fund who would limit or compromise the security of a lender or would provide for the termination or withdrawal by the Investing Fund of its capital commitment to the Fund. Best practice recommends a letter to investors for the above circumstances.
When preparing an investor letter, a few key provisions should be included as a prerequisite for the investor’s inclusion of the fund in the borrowing base of the facility. The following is by no means intended to be an exhaustive list, and the lender’s legal advisers should exercise due diligence with respect to each investor in the fund and adapt the terms of the letter to investors accordingly.
Fund documents. The first paragraphs of the letter to investors must clearly identify the subject of the letter to investors and describe the documents governing the subscription made by the investor from the fund to the fund. The purpose of the letter to the investor is to create a written agreement between the investor of the Fund and the lender placing the two parties in the contractual relationship in which the investor of the fund recognizes the facility of the lender to the Fund and that he could be called upon to make a capital contribution to repay the unsettled obligations of the facility The documents governing the subscription of the investor of the fund are generally a subscription agreement (“subscription agreement”) and a partnership agreement under which the fund investor has agreed (a) to purchase a limited partnership interest in the fund and (b) to finance capital calls from the fund up to the amount of its commitment (“Commitment”). The investor’s letter must specifically state the overall commitment, the dollar amount of the commitment that has been called by the Fund to date, the dollar amount that has been funded to date by the fund investor and the dollar amount of the remaining unfunded commitment. (“Unfunded Commitment”) which may be withdrawn upon delivery of one or more written requests in accordance with and in accordance with the Partnership Agreement (“Fundraising Notice”).
Unconditional obligation. It is essential that the letter from the investor contains a provision in which the investor of the fund acknowledges and confirms to the lender that, under the terms of the partnership agreement, the investor of the fund (a) is and will remain absolutely and unconditionally obliged to finance its unfunded commitment. in accordance with the Partnership Agreement and (b) agrees to fund the capital calls without set-off, counterclaim or defense, including, without limitation, any defense under Section 365 of the US Bankruptcy Code. At the heart of the letter to investors is the agreement of the fund investor to unconditionally fund a call for funds and waive the defenses. It gives the lender the assurance that the fund investor is committed to ensuring the continued financing of the fixed assets and helps to mitigate the potential risk that the fund investor will fail or refuse to finance a call for funds to repay any obligation in question. course under a facility. In addition, these contractual waivers create an estoppel that would prevent the Fund investor from asserting a defense against the financing of a call for capital under the partnership agreement.
Recognition of the installation. The letter from the investor must contain a paragraph providing for the acknowledgment and consent of the investor of the Facility Fund. This paragraph would include some or all of the following: (a) recognize that the facility is an underwriting line of credit or a similar term as provided for in the partnership agreement; (b) agree to the direct pledge and assignment by the Fund and the general partner of the Commitment and the right to issue Capital Call Notices and to receive all of the proceeds of the call contribution capital in order to secure the payment and performance of the Fund’s obligations under the Establishment; (c) declare that no default or event of default has occurred which would constitute a defense or right of set-off against the obligation of the Fund investor to finance its commitment or otherwise reduce the commitment and no defense or right of set-off exists against the obligation of the Fund investor to finance its commitment; (d) declare that the subscription agreement, the partnership agreement and the investor’s letter constitute valid and binding obligations, enforceable against the investor of the fund; (e) acknowledge that while the facility is in place, the General Partner and the Fund have agreed with the lender not to modify, terminate, reduce or suspend any of the obligations of the Fund investor under the subscription or partnership agreement; (f) acknowledge and confirm that, while the facility is in place, all payments made by the Fund Investor under the Partnership Agreement will be made by wire transfer to an account maintained with the Lender and into which the fund is also committed. the lender as collateral for the Facility; and (g) agree to honor any capital call notice given to the fund investor on behalf of the lender, without set-off, counterclaim or defense. These acknowledgments are an important part of the letter to investors, as they warn the Fund investor of the facility, remove any ambiguity as to whether the facility is authorized under the partnership agreement, create effective estoppel, and establish the consideration by the fund investor. make the letter to investors a binding contract. In addition, these acknowledgments and agreements by the Fund investor, together with the guarantee given by the Fund under the collateral documents evidencing the facility, collectively form the basis on which a lender may seek recovery for repayment of its facility. .
Sovereign immunity. The Eleventh Amendment extends the doctrine of sovereign immunity to governments and state agencies and protects them from prosecution in federal or state court without their consent. Many state constitutions and laws have made exceptions to sovereign immunity protections, for example when a state entity enters into a commercial contract with a private person or company. When a fund investor is a public institution or a state agency, it is important to know whether a statutory or common law exemption applies under state law. In our experience, most state laws do and would preclude separate consent to bring an action in writing via an investor letter. However, if a statutory waiver of sovereign immunity protection does not apply or if the fund investor is also a single managed fund, including express consent to such waiver in a letter to investors would be prudent and will have the same effect as a waiver of the doctrine of sovereign immunity against the investor of the Fund. A typical waiver of sovereign immunity paragraph in a letter to investors will include an acknowledgment by the fund investor that (a) it is subject to commercial law with respect to its obligations under the partnership agreement, subscription and investor letter; (b) the conclusion and execution of the partnership contract, the subscription contract and the letter to investors constitute private and commercial acts rather than governmental or public acts; and (c) any sovereign immunity does not release the Fund Investor from any of its obligations under this Letter, the Subscription Agreement or the Partnership Agreement, including, but not limited to, the obligation to finance the Commitment.
Conclusion. While the prevalence of Letters to Investors has waned over the past few years, we still consider Letters to Investors to be a valuable tool that lenders can rely on when considering a facility at one of the loan structures. above funds. Letters to Investors can be very effective tools in mitigating potential risks to a lender by having a contractual relationship with the fund investor, an agreement by the fund investor to unconditionally finance capital contributions for the purpose of repay the facility without any defense, set-off or counterclaim, and an affirmative consent to the Fund entering into the facility with the lender.