confirmation will the SBIC fund manager provide? Valuation and credit discipline. How are loans and equity positions valued? What are the covenant, watch-list, workout and reserve practices? How did the team handle prior losses? Fund terms and governance. Experienced SBIC fund counsel can assist the bank in reviewing the key terms and market conformity of the limited partnership agreement, private placement memorandum, subscription agreement and other ancillary agreements of the SBIC fund. A review of the provisions regarding key persons, devotion of time, removal, conflicts of interest, expense allocation, valuations, advisory board rights, transfer restrictions and reporting obligations can deepen the bank’s understanding of the investment terms and mechanics, allow for thoughtful negotiation of a side letter that targets rights important to the bank, and align the bank’s expectations with those of the SBIC fund manager. Bank-specific legal and accounting review. Does the proposed investment sit within the bank’s investment authority? Does the proposed commitment amount keep the bank below the 5% statutory cap and any other applicable regulatory or diversification limits? Side letter. What bank-specific protections and rights are required to be negotiated into the side letter? 4. The Side Letter: Provisions Banks Commonly Request A bank’s side letter is typically where the regulatory and relationship benefits described above are secured for the bank. Bank investors in SBIC funds typically negotiate the provisions below. The chart below summarizes typical side letter requests and provides additional context and negotiating points for those requests, although outcomes vary with the size and timing of the bank’s commitment and its role in the particular fundraise.
Provision
Typical Side Letter Requests
Additional Notes on These Provisions
MFN rights are commonly included in bank side letters. However, the carve-outs from the MFN process vary, and banks should pay attention to the number and breadth of those carve-outs to ensure the MFN rights are not unreasonably diluted.
Most favored nation (MFN) rights relative to investors with equal or smaller capital commitments to the bank.
Most favored nation provisions
A quarterly CRA report listing each new portfolio investment and the location of the portfolio company’s headquarters and significant operations, together with the information the bank needs for CRA measurement and examinations. When the bank identifies a qualifying investment, the SBIC fund manager confirms in writing, to the extent CRA regulations permit, that the bank is assigned the credit or, if other limited partners claim the same investment, a pro rata share based on commitments. A covenant that the SBIC fund manager will consider investments in portfolio companies located in the bank’s assessment areas, as identified by the bank and updated from time to time.
CRA credit is not guaranteed through this process, as the bank’s regulator determines CRA consideration. However, SBIC fund managers are generally receptive to providing the information banks need to claim the credit. Banks should also pay attention to whether the credit allocation is an “opt-in” or “opt-out” structure, as opt-in structures generally provide greater CRA credit allocation to bank investors, within certain limits, than opt-out structures.
CRA credit allocation
While the SBIC fund manager may agree to use commercially reasonable efforts to consider these investments, the decision whether to make them remains in the general partner’s discretion.
Assessment-area investment
4
Powered by FlippingBook