Sabah Nawaz, Cadwalader Wickersham & Taft

Investec Bank, a major player in the fund finance industry, has worked with the Cadwalader fund finance team for over 15 years. For this deal, the two teams came together to try to solve a liquidity, devising a first of its kind structure to bring in institutional capital into the fund finance industry with a €1bn secured note programme with one of the UK’s largest insurance companies.

Taking standard LMA banking form participations as a starting point and tailoring those to produce structured note participations, was complex as the programme was designed for investors that were insurance funds. Such insurance investors, for matching adjustment reasons, needed the designation and the funding of the notes to correspond to specific requirements. The operations workstream was immense and Cadwalader was closely involved in discussions between the client’s operations and settlement team, the investors’ operations teams and the settlement team.

The challenges included interposing an Irish SPV note issuer between the client and the third-party investors, which required detailed Irish and English law insolvency analysis. In addition, considering the underlying jurisdictions of the various fund borrowers, there were extensive tax workstreams, which involved a range of law firms advising on UK, US, Irish, Luxembourg, Cayman Islands, Guernsey and Jersey tax issues.

Cadwalader, acting as deal counsel, took the lead in the formulation of the SPV note structure. The firm also designed the innovative note programme which tracks the underlying fund finance facilities. The note programme includes LMA loan participation mechanics that have been incorporated in a bespoke note format.

The Cadwalader team was led by London fund finance partner Samantha Hutchinson and capital markets partner David Quirolo, with support from capital markets special counsel Sabah Nawaz, who joined the firm in 2017 having qualified at Freshfields in 2006.

“I mainly work on bespoke and varied structured finance transactions. For example, I acted for the sponsor group on the first European CMBS after the global financial crisis. This transaction was a landmark one for the real estate finance industry, which, at the time, was still emerging from the credit crisis,” she says. “It was exciting to be at the forefront of creating and developing a new product (CMBS 2.0) for the industry at that challenging time. I am proud that this innovative ‘first of its kind’ transaction still forms the bedrock of current CMBS transactions. In 2017, I acted for Citigroup on the first Austrian credit tenant leasing bond issuance of €425m, backed by real estate lease rentals from a parliament building.”

In the Investec deal, the bank was able to get an investment-grade rating with an external credit rating agency for the product. That, in turn, allowed insurers to rely on external ratings to build their own models to allocate it to the strategy and put it in a capital investment-grade return.

The transaction opens new sources of finance for clients. Clients can reach beyond the traditional LMA market to insurers who have individual requirements. As one of the first transactions in this new product area, there have been high levels of interest in it from other banks that have exposure to fund finance facilities. Meanwhile, the client is already in discussions with other investors in respect of establishing similar programmes.

Nawaz says the “sheer innovation” on this deal will always make it stand out as they created a structure from the start without any blueprint and collaborating with Investec to develop the product.

“The collaboration between the Cadwalader funds finance team and the Cadwalader structured finance team was essential to the success of the transaction, as the structured finance team needed to understand the workings of the fund finance facilities in order to design a structured note programme of this magnitude. Similarly, Cadwalader worked with different teams at Investec, ranging from the Investec funds finance team and the Investec structured finance team to the Investec operations team, to see the transaction through, from term sheet stage to settlement,” she explains.

“The challenge was not having a precedent to work from and also matching the features of LMA funds finance facilities to the features of structured finance notes. It was unique as a market first and because fund finance facilities are not a typical asset that are subject of a structured finance transaction, so the Cadwalader structured finance team had to grasp the features of fund finance facilities in order to design the note programme with Investec. It has shown me that co-operation and understanding between a large number of teams at different institutions is essential for a transaction of this size to be successful.”

The fund finance industry has grown from being a little-known bespoke area of finance to one which is now globally valued at more than $600bn, in which most banks and financial institutions in Europe and the US now participate, and on which private markets managers across all asset classes rely for liquidity.

The industry has grown so quickly and managers’ desire for this type of liquidity is now so great that the challenge faced by the legal finance industry is how to meet that demand. The Covid pandemic saw many managers’ capital needs increase significantly both for the purpose of supporting underlying portfolio companies struggling under the weight of lockdowns and other restrictions and to invest in new businesses.

Harnessing non-bank capital to fill this void became a top priority but given the landscape was traditionally dominated by banks, educating potential non-bank lenders on a product whose history spans over 20 years, at a time when physical meetings were non-existent would prove to be challenging.

Given that the product is new, there were not suitable programme precedents that Cadwalader could use and the need to draft numerous new programme documents for a bespoke transaction was challenging, as it required detailed consideration in relation to security and insolvency issues.

Nawaz says, despite worrying that this would be a difficult feat to achieve during the pandemic, the team adapted quickly. “When we entered the first lockdown, the prospect of developing such an important product and executing a transaction of this size and nature with different stakeholders, seemed daunting. However, the different teams adapted quickly to remote work. For example, there were regular all party calls and Investec encouraged us to adopt video conferences. This has changed the way we work, as parties are still using video conferencing on current transactions, which helps communication between different teams,” she says.

“I learnt that communication is key, including internally. It is important to check in on other team members even by telephone, so that we are able to update each other and maintain momentum and morale, in the same manner that we do when we are in the office.”