Quarter-End Market Update
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As we usher in spring and hopefully finally say goodbye to the
worst of the COVID-19 pandemic, deal volume and overall market
activity remain extremely robust. With less than a week to go in an
eventful first quarter, we’re seeing sustained growth in fund
finance despite broader market uncertainties and geopolitical risk.
Here are a few updates as we head into Q2:
- Here’s where we are. Our new fund finance
matter count at Cadwalader is up 15% globally year-to-date versus
2021. Time accruals, similarly, are up 16% over the prior year.
These early indicators point to another double-digit growth year in
the fund finance origination market.
- Range bound pricing. Subscription facilities
continue to price in a relatively well-defined range as opposed to
the wider range and somewhat unpredictable trend that prevailed
pre-COVID. Within this range, pricing is holding steady versus 2021
trends rather than tightening.
- Credit spread adjustments. SOFR first
amendments, facilities and early opt-in elections are continuing in
earnest as we wave a final goodbye to LIBOR. This is leading to
some differences on market treatment for credit adjustment spreads.
The broader loan market may influence where fund finance ends up on
credit spread adjustments. At the moment, it looks like a
market-wide standard may prove elusive in 2022.
- Prime rate loans. The prime rate moved in lock
step with the Fed hikes last week, while SOFR continued to trade a
few basis points inside the effective Fed Funds rate. Prime indexed
loans, which are more common on short-form credit agreements, have
priced in a much wider range in the past year than SOFR loans.
While pricing has been competitive, all-in interest rates for prime
driven transactions typically end up higher than on average SOFR
- Same base case. In periods like the past few
weeks, the balance sheet lending model of fund finance becomes an
advantage as capital markets-oriented businesses have been
challenged to recalibrate. There is no question that risk tails are
evolving, but we’re holding to the same base case outlook for
robust growth in 2022 with a greater diversity in facility
- Russian sanctions. We have seen a handful of
deals impacted in the last week by recently sanctioned investors -
typically, a Russian entity or entity that is beneficially
controlled by a Russian national. In most cases, the impact on the
borrowing base and actual resulting defaults under the loan
documents have been minimal. That said, it raises an interesting
conversation about potential market-wide exposure to Russian money
and grappling with reputational risk issues. Our team is
well-versed and working to assist a number of clients who are at
the forefront of this issue. Call us if we can be helpful.
- Return of the bespoke. We predicted it coming
into this year. The steady yield of more and more interesting
structures is happening. We have seen a noticeable increase in
non-bank lenders, including insurance companies. We are also seeing
the early tally of NAV and hybrid deals pacing at a level above
last year’s record numbers. Banks have a greater risk appetite.
More SMA facilities are closing. We saw 54 last year and look to
beat that number in 2022. Finally, ESG facilities, something we
have written about extensively and noted would blossom this year,
are trending (albeit slowly) toward a material increase in volume
despite the regulatory headwinds and concerns over
- Go big or go home. Our prediction of mega
deals (those over $1 billion in total lender commitments) doubling
in volume over 2021 is coming to fruition. We have seen a handful
of multibillion dollar sublines to start the year. This makes sense
coming off a record fundraising year with more than $1.4 trillion
in capital raised across more than 3,300 funds in the private funds
market. Average fund size continues to move up as the capital
gravitates to the larger platforms. This is helping drive the
current demand for mega facilities.
- Can fundraising momentum continue? The early
read on fundraising shows that momentum is carrying over into 2022.
Given that only a partial quarter of data is available so far, it
may be too early to guess at full-year numbers, but private equity
and infrastructure strategies appear to have significant traction
in fundraising. Preqin data showed a strong rebound in horizon IRRs
on an industry-wide basis in 2021. Healthy overall performance
combined with greater public market volatility should bode well for
private capital allocations.
- Seventy’s our number. The Cadwalader Fund
Finance team in the U.S. and UK now includes 70 attorneys and
paralegals. That’s up from 44 coming into 2021. A sign of
remarkable growth that reflects the momentum of our broader market
as a whole.
Thanks to all for a great first quarter, and good luck the rest
of the way. We will be tracking it right here with you, and helping
navigate the next set of issues, whatever they may be.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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