So you’ve gotten your approval from IC. You enjoy 12-24 hours of chilling the fuck out and letting your brain recharge. But how are you going to turn all of this play money you’ve been discussing into real money? The answer is Closing which is today’s topic. Specifically, closing from the perspective of a direct lender administrative agent. This “admin agent” (also known as “lead left arranger”) is the head honcho of negotiating the credit agreement, setting allocations, handling KYC requests, and making sure all wires are sent to the right place with the right amount of money (“sources & uses”).
Going to break down each of these for you guys. I think this will be relatable to anyone that’s done it before, and also a good learning experience for those who haven’t.
Closing is a very primitive process. This is not something I have ever seen covered in training materials that can be found online – there is no “WSO closing guide” like there is an LBO modeling guide. That is probably because it is such a fucking pain in the ass that no one wants to talk about it more than they have to. If LBO modeling is the equivalent of a spinning one-handed catch in football, closing is the equivalent of a left guard setting a picture perfect form block to buy his QB another second to throw: boring and a grind, but necessary to get the job done. So let’s continue with the inaugural memorialization of this fucked up process that causes pounds of hair to fall out of my head every time it occurs.
Credit agreement/documentation
I’ve talked about what a credit agreement is and many of its key provisions in previous blogs (check them out if you haven’t yet) so I’m not going to go down a rabbit hole again. However, it’s important to note that documentation is the most important and time consuming of all closing processes. You’re constantly talking to your lawyers, who then talk to the sponsor lawyers, who then talk to the sponsor, and then the cycle reverses. It’s like a white collar game of telephone. This iterative process is a constant cloud that hangs over closing, starting on day 1 after receiving approval and not ending until the deal closes. I will say, it’s the only thing related to closing that requires an ounce of brainpower. Everything else I talk about below is pure manual processing.
Allocations
Sometimes the admin agent is in charge of finding other lenders to fill out the bank group (called a “syndicated deal”). Other times, the sponsor will find the lenders themselves (called a “club deal”). Either way, either of these processes end with allocations, which is where each lender gets their final hold amount. In an oversubscribed deal, sometimes lenders will receive a lower allocation compared to the ticket they turned in and gets pissed off. Sponsor usually doesn’t really care though. From an operational/closing perspective, each lender will provide the agent with all the different legal entities that will be funding and signing the credit agreement. So let’s say KKR Credit has a $100MM commitment for a deal. They very rarely are going to sign/fund under “KKR Credit LP.” Instead, given the variety of funding sources these lenders use, they are going to flood the agent with 10-20 different entities (known as “subfunds”) – some of these will be very similar such as “KKR Overleveraged Fund II”, “Overleveraged Fund KKR II LP”, and “Overleveraged KKR Fund III”. Each of these will be sending different wires, some might net their OID/UW fee from their wire and some might want the fee sent separately. And that’s just one lender! There might be 10-100 other lenders each with multiple subfunds. The agent is in charge of hunting down all wire details for these while also making sure each fund signs the credit agreement. There’s so always a bunch of last minute changes so it’s a massive pain in the ass and personally my least favorite part of closing.
Dealing with back office
The back office operations people are your sidekicks helping to close the deal. If you are Batman, they are Robin – but imagine Robin was 5’1, missing an arm, and only spoke German.
Tangent: I think it’s kind of silly when people will say to one another “stop acting like you’re better than me/us/them. We are all equal.” Like that’s all nice and fun but I live in reality. Some people are just better at living life than others. I can say with 100% certainty fact that Tom Brady is better than me. Bro had the chance to go into finance and said “thanks BAML but no thanks, I’d prefer to be the best athlete of all time and make $500MM and also be incredibly handsome and also marry the one person on earth who is hotter and richer than me.” I say all that to say, I am better than the operations team, and you probably are too.
Tangent #2: the funniest shit I’ve seen in awhile is a Twitter account called @BackOfficeNews, which tries to report on “back office news”. Huge new KYC news dropping!!! Lolol. Of course it’s hardly been updated since its launch, classic ops move. Also classic move of 99% of anybody that tries to start an even tangentially related finmeme account (sounds fun for a day, then people get bored. Human nature)
Every ops person I’ve ever worked with has been a nice person, but 80% of them are truly incompetent. You know that stupid show Impractical Jokers? It’s just these dumb meatheads telling each other to be silly in public. Well, I swear ops people are on some incredibly niche spinoff of that show, telling each other to fuck with the investment team. They have an earpiece in and are telling each other “He told us 13 times that OID was 2.5%, ask him if its 2% or 3%.” and “the borrower legal entity is in the credit agreement, but ask him for the name anyways. He’s gonna be so pissed it will be hilarious”.
KYC
KYC stands for “Know Your Customer” but the more appropriate abbreviation is CYA “Cover Your Ass”. Lenders have to ask a bunch of dumb questions to make sure no fraud or crime is being committed by the company or its executives. So this leads to me having to, with a serious face, ask my lawyers to confirm that my portco, a specialty distributor of plumbing products used in commercial buildings headquartered in Kentucky, does not in fact have a side business making bombs in Afghanistan or Syria. Important to note that private credit firms have significantly more reasonable KYC requirements than banks. Banks have such a pain in the ass process that it’s the primary reason that a lot of people quit their job. Ask someone who works in Corporate Banking about flood insurance and you will see some life drain from their eyes.
Closing Wires / S&U
Closing morning is like Christmas morning, expect instead of coming down the stairs to a bunch of presents, you come down to a stressful list of final tasks/double checks. For instance, the wire sent to the borrower on closing morning has to be exactly correct to the penny, so you need to make sure you are netting lender fees and expenses correctly. Admin agent will typically provide the sponsor with a draft funding calculation a couple days before closing. Often times the sponsor will be a pain in the ass here – “hmm I know this is a $300MM debt raise, but I’d like to see more detail on the $4,302 of lender expenses that you claim to have. Please send me the backup with receipts. Thx. Also fuck you.” Once sponsor signs off, they will include it their final sources and uses (“S&U”) file and send it to you. That file is actually super interesting – you will be able to see things such as debt paydowns, detailed breakouts of all the M&A fees, and equity structure detailing who is rolling over equity vs. cashing out. The sponsor only send this to the agent and annoying ass non-agent lenders always ask to see it. No, you can’t see it. Win the mandate next time loser!! You then have to make sure the ops team enters in the right wire info. I never check the wire info they enter less than 800 times because I trust their ability to type in basic instructions as far as I can throw them.
Q&A (Submitted by IG Followers)
Putting this behind a paywall - to be honest, these blogs take awhile and this is going to help incentive me to keep churning out content. I know you guys can spare $5 a month for some good niche finance content! Also, if you are a paid subscriber, hit my IG DM’s up whenever you want to get your question included in the next one.
Keep reading with a 7-day free trial
Subscribe to Unstructured Cap's Newsletter to keep reading this post and get 7 days of free access to the full post archives.