KBRA released a report exploring the mechanics, benefits and challenges of revolving credit facilities (RCF) within the structured credit market. Low-levered RCFs, often executed privately, have become a common tool in the rated structured credit universe. RCFs are a flexible source of financing that allows issuers and lenders to manage credit risk while optimizing financing availability through its dynamic structure, which often incorporates a “borrowing base” overcollateralization (OC) mechanism. These facilities essentially act as a line of credit provided by preselected lenders through a special-purpose vehicle (SPV), which invests in a portfolio of corporate loans.
Key Takeaways:
- RCFs are secured lines of credit, with the flexibility to adjust leverage and terms based on collateral composition, market conditions and performance.
- RCFs are commonly used in structured credit transactions collateralized primarily by middle market (MM) loans, with allowances for other types of loans.
- Due to increased flexibility with respect to portfolio allowances, rated RCFs typically have lower leverage, higher credit enhancement and more excess spread compared with similarly rated collateralized loan obligation (CLO) tranches.
- Borrowing base mechanics create credit enhancement akin to OC ratio tests in CLOs, but the triggers are typically more sensitive to collateral degradation.
- Funds from facilities’ drawdowns are quickly accessible to borrowers, but funding risk can be introduced by lenders participating on a commitment basis.
