A spring in our approach March 2022 | Issue 168 – Quarterly Market Update | Cadwalader, Wickersham & Taft LLP

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As we usher in spring and finally say goodbye to the worst of the COVID-19 pandemic, trading volume and overall market activity remain extremely robust. Less than a week away from a turbulent first quarter, we are seeing continued fund funding growth despite broader market uncertainties and geopolitical risks. Here are some updates as we head into Q2:

  • Here is where we are. The number of new fundraising cases at Cadwalader was up 15% globally year-to-date compared to 2021. Time accumulations, likewise, were up 16% year-to-date. ‘last year. These early indicators point to another year of double-digit growth in the fund origination market.
  • Range-related pricing. Subscription facilities continue to price within a relatively well-defined range as opposed to the wider range and somewhat unpredictable trend that prevailed pre-COVID. Within this range, prices are holding steady against 2021 trends rather than tightening.
  • Credit spread adjustments. SOFR’s early amendments, easing and early elections continue in earnest as we bid a final farewell to LIBOR. This leads to some differences in the market’s treatment of credit adjustment spreads. The broader lending market can influence where funding funds go during credit spread adjustments. At the moment, it looks like a market-wide standard may prove elusive in 2022.
  • Preferential rate loans. The prime rate moved in line with the Fed hikes last week, while the SOFR continued to trade a few basis points inside the effective Fed Funds rate. Prime indexed loans, which are more common on simplified credit agreements, have been priced in a much wider range over the past year than SOFR loans. Although pricing has been competitive, overall interest rates for premium-driven transactions generally end up being higher than the average SOFR loan.
  • Same base case. In times like the past few weeks, the fund finance balance sheet lending model becomes an advantage as capital markets-focused businesses have been challenged to recalibrate. There’s no doubt that risk tails are changing, but we’re sticking to the same base-case outlook for robust growth in 2022 with greater diversity in facility types.
  • Russian sanctions. We’ve seen a handful of transactions impacted in the past week by recently sanctioned investors – typically, a Russian entity or an entity controlled by a Russian national. In most cases, the impact on the borrowing base and actual defaults resulting from loan documents has been minimal. That said, it does raise an interesting conversation about potential market-wide exposure to Russian silver and reputational risk issues. Our team is knowledgeable and working to help a number of customers who are at the forefront of this issue. Call us if we can be of assistance.
  • Return of made-to-measure. We predicted it this year. The steady yield of more and more interesting structures occurs. We have seen a notable increase in the number of non-bank lenders, including insurance companies. We are also seeing the early count of NAV and hybrid deals moving higher than last year’s record numbers. Banks have a greater appetite for risk. Other SMA facilities are closing. We saw 54 last year and are looking to beat that number in 2022. Finally, ESG facilities, which we’ve written about extensively and noted will flourish this year, are trending (albeit slowly) towards a significant increase volume despite headwinds and regulatory concerns. on greenwashing.
  • Go big or go home. Our forecast of mega-deals (those over $1 billion in total lender commitments) doubling in volume in 2021 is coming to fruition. We saw a handful of multi-billion dollar sublines to start the year. This makes sense after a record fundraising year with more than $1.4 trillion in capital raised in more than 3,300 funds in the private equity market. Average fund size continues to increase as capital gravitates towards larger platforms. This is helping to drive the current demand for mega-installations.
  • Can the fundraising momentum continue? Early readings on fundraising show momentum continuing into 2022. With only a partial quarter of the data available so far, it may be too early to guess the numbers for the year. whole, but private equity and infrastructure strategies seem to have significant effects. traction in fundraising. Data from Preqin showed a strong rebound in industry-wide horizon IRRs in 2021. Healthy overall performance combined with greater public market volatility should bode well for private capital allocations.
  • Seventy is our number. The Cadwalader Fund Finance team in the US and UK now includes 70 lawyers and paralegals. This is an increase from 44 in 2021. A remarkable sign of growth that reflects the dynamics of our broader market as a whole.

Thank you all for a great first quarter and good luck for the rest. We’ll follow it up here with you and help you solve the next set of issues, whatever they may be.

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