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ARTICLE · 05 SEPTEMBER 2024

How The Automatic Stay In Bankruptcy Can Affect Net Asset Value Facilities

Mayer Brown
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In net asset value (NAV) facilities, the borrowing capacity typically adjusts to reflect changes to the value of the underlying investment portfolio, and borrowers face the risk of potential borrowing base deficiencies or minimum net asset value/loan-to-value covenant breaches if the value of such assets sharply drops.

United StatesInsolvency/Bankruptcy/Re-Structuring
Sean Scott
Sean Scott
Ryan M. Michalko
Ryan M. Michalko
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Executive Summary

In net asset value (NAV) facilities, the borrowing capacity typically adjusts to reflect changes to the value of the underlying investment portfolio, and borrowers face the risk of potential borrowing base deficiencies or minimum net asset value/loan-to-value covenant breaches if the value of such assets sharply drops. These risks can become particularly pronounced during a financial downturn or in the event of a bankruptcy or other credit event relating to a borrower or an underlying portfolio asset. In either circumstance, the automatic stay can inhibit a borrower's access to distribution proceeds, affecting its liquidity and ability to meet financial obligations. In this Legal Update, we discuss the purpose of the automatic stay, share options for relief from the stay, and offer recommendations for navigating the complications that the automatic stay can create for NAV facility lenders.

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