Provision
Typical Side Letter Requests
Additional Notes on These Provisions
This is typically structured as an acknowledgment of the bank’s interest rather than a firm commitment from the SBIC fund. The SBIC fund manager has no duty to make these introductions, may work with other lenders, and no portfolio company is required to use the bank. However, many managers recognize and appreciate the benefit of being a good partner to banks and will typically try to make good on these requests. This is typically structured as an acknowledgment of the bank’s interest rather than a firm commitment and may contain parameters governing the decision timeline, information to be provided, and co-investment terms and structure.
A covenant to introduce senior lending opportunities the SBIC fund manager sees that suit the bank, such as portfolio refinancings or credits outside the SBIC fund’s mandate.
Senior lending opportunities
Acknowledgment of the bank’s interest in co-investing, with the right to direct any opportunity to its affiliates.
Co-investment
The right to share certain fund information with banking regulators on an ongoing basis in connection with routine examinations without notice to the SBIC fund manager and to make periodic, legally required disclosures of the investment’s basic terms. If the SBIC fund surrenders its license, it will comply with the OCC’s retention conditions (no new investments other than cash equivalents). The SBIC fund manager will give prompt notice if the SBA intends to revoke the license. If loss of the SBIC fund’s SBIC status would put the bank out of compliance with banking law, including the Volcker Rule, the bank may withdraw or transfer without the manager’s consent. For a pre-license closing, the bank’s capital commitment is conditioned on licensure and SBA approval of the side letter. Contributions are held in escrow and returned without deduction if the SBIC fund does not obtain the SBA’s licensing approval within a set period, such as 120 days. After licensing, a representation that the license is in force and that no revocation proceedings are pending. Quarterly copies of SBA Form 468, prompt notice of unresolved material SBA examination findings, license revocation, transfer to the SBA’s liquidation office or a decision to seek receivership, and periodic capital impairment information. Permitted transfers to bank affiliates, notice when other limited partners seek to sell, and an opportunity to bid when the SBIC fund manager is marketing the sale of another limited partner’s interest.
This provision may vary based on the state and federal regulatory requirements of the bank.
Regulatory disclosure
This provision may include a valuation dispute provision and covenants regarding the payment of the withdrawal amount.
License surrender and revocation
Escrow terms and structures vary, but this general approach is widely accepted.
Licensing conditions
Enhanced reporting is generally accepted, although the specific reporting packages and forms vary by SBIC fund manager.
Enhanced SBA reporting
Affiliate transfers are usually accepted, but remain subject to SBA consent and investor-eligibility requirements. Notices of secondary purchase opportunities are often limited to commercially reasonable efforts.
Transfers and secondaries
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