NAV Financing for Private Credit Funds: Convergence with Securitisation | Global law firm

Executive summary

• Convergence is accelerating. NAV financing structures for private credit funds increasingly incorporate or constitute a securitisation under EU frameworks.
• Regulatory classification is critical. Many credit fund NAV facilities may fall within the broad regulatory definition of “securitisation”, triggering significant obligations (risk retention, transparency, due diligence).
• Commercial upside can be material. Securitisation techniques can deliver higher advance rates, more competitive pricing, broader investor participation and improved capital efficiency for lenders.
• Structural discipline is essential. Early-stage regulatory analysis and careful structuring, particularly around tranching and risk retention, are key to avoiding execution risk.
• AIFMD II is a catalyst.  New rules for loan-originating funds and leverage restrictions are likely to fuel the development of new leverage and securitisation-compatible structures.

Introduction

The NAV financing market for private credit funds has evolved rapidly into a sophisticated spectrum of financing techniques, increasingly aligned with securitisation techniques such as the use of insolvency remote vehicles and tranching. In many cases, these structures either resemble or fall within the scope of securitisation under EU and UK regulation.

With the global NAV finance market estimated at approximately USD 100 billion and expected to grow materially, understanding this convergence is now central for banks, credit funds and institutional investors. It has direct implications for structuring, regulatory compliance and capital efficiency.

This briefing outlines the key features of credit fund NAV financings and analyses the growing integration of securitisation techniques.

1. The NAV financing landscape for credit funds

Market dynamics and use cases

NAV facilities are financings provided at fund or, more often, SPV level, with repayment dependent primarily on the cash flows of underlying portfolio assets rather than on uncalled LPs commitments.

In the context of private credit funds, these facilities serve distinct and increasingly strategic purposes:

• Portfolio leverage: supporting the acquisition of additional credit assets
• Return enhancement: improving investor IRRs through structural leverage
• Liquidity management: providing flexibility at portfolio level for evergreen funds or funds having reached the end of their investment cycle
• Early-stage optimisation: can be deployed early in a fund’s lifecycle rather than as a late-stage tool

They can be particularly well suited to evergreen structures and multi-currency credit portfolios, where they can also support hedging strategies.

Key structural features

Credit fund NAV facilities typically exhibit the following characteristics:

• Security package: often relatively streamlined where assets are consolidated within a single holding vehicle, allowing direct security over credit assets, bank accounts and intragroup cashflows as well as the shares of the borrower SPV.
• Fund parties credit support: in some circumstances, lenders may require the main fund structure to provide credit support through guarantees to cover the obligations of the borrower SPV.
• Diligence approach: less asset-by-asset focus and greater emphasis on portfolio construction criteria, transferability restrictions and underwriting standards.
• Diversification controls: concentration limits by sector, geography or borrower profile are standard.
• Borrowing base mechanics: eligibility criteria and LTV frameworks (often dynamic) drive advance rates, which may increase as portfolio diversification improves.The parties will also often discuss the conditions upon which a new investment may be included in the borrowing base, including if a prior consent from the lender shall be required.
• Extensive information rights: lenders insist on extensive information rights regarding the credit assets and events affecting them.
• Valuation: parties need to agree on valuation methodology, as well as mechanisms to regulate lenders’ rights to challenge NAV valuations made by the fund manager or to request third party valuations.
• Private auction sale: upon acceleration, pre-agreed private auction sale provisions to regulate how the lenders may liquidate the outstanding portfolio of credit assets. Fund managers often negotiate right to participate in the private auction process.
• Facility flexibility: structures range from term facilities to revolving lines, particularly for evergreen or actively managed portfolios. Multicurrency features, accordion and maturity extension features are common.

These features contribute to an increasing overlap with asset-based lending facilities.

2. Securitisation framework: when NAV financing crosses the line

Regulatory perimeter

Credit fund NAV facilities are more likely than other NAV products to fall within the definition of “securitisation” under the EU Securitisation Regulation¹ , given its broad scope.

In substance, a structure constitutes a securitisation where:

• payments depend on the performance of underlying exposures to which are associated credit risks (such as a portfolio of credit assets);
• losses are allocated through tranching; and
• the structure does not qualify as specialised lending.

NAV facilities for credit funds are structured as a senior financing on the basis of an advance rate whereas a junior funding is provided by the fund through subordinated debt or hybrid instruments. As repayment may be dependent on the performance of the pool of credit assets held by the borrowers, such senior/junior structure may easily qualify as a securitisation.

A further question is whether the borrower SPV qualifies as a securitisation special purpose entity (SSPE), defined under the EU Securitisation Regulation as being “a corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator“.

Even relatively “plain vanilla” NAV structures may fall easily within the scope of the EU definition of securitisation, requiring early and careful regulatory analysis.

Key regulatory obligations

Where a transaction qualifies as a securitisation, material obligations are imposed on the fund parties and the lenders.

Location of the borrower. A SSPE must comply with the requirements set out in Article 4 of the EU Securitisation Regulation, which restricts the jurisdictions in which it may be established. Specifically, a SSPE may not be located in jurisdictions that are considered high-risk for AML/CFT purposes or that are designated as non-cooperative for tax purposes. Until 2024, these restrictions affected entities based in the Cayman Islands; however, this is rarely an issue in practice, as the borrowing entity in most European NAV financings will typically be established within the EU, in particular in Luxembourg or Ireland.

Due diligence. Article 5 of the EU Securitisation Regulation imposes due diligence requirements on institutional investors. Prior to holding a securitisation position, an institutional investor (other than the originator, sponsor or original lender) must verify that the originator or original lender grants credits on the basis of sound and well-defined criteria and clearly established processes, that risk retention is maintained on an ongoing basis in accordance with Article 6, and that the transparency requirements of Article 7 have been satisfied. In addition, the institutional investor must carry out a due diligence assessment enabling it to assess the risks involved, considering (among other things) the risk characteristics of the securitisation position and the underlying exposures, as well as the structural features of the securitisation that may materially impact performance. After acquiring a position, the investor must establish written procedures to monitor compliance and performance on an ongoing basis. These obligations apply to credit institutions, investment firms, insurance and reinsurance undertakings, AIFMs, UCITSmanagement companies, and institutions for occupational retirement provision.

Risk retention. Under Article 6 of the EU Securitisation Regulation, the originator, sponsor or original lender must retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. This interest must be measured at origination and must not be subject to any credit-risk mitigation or hedging. In credit fund NAV financing transactions, this requirement is satisfied by the retention of the first loss tranche, which in practice takes the form of subordinated funding (typically through notes or hybrid instruments) provided by the fund to the borrower SPV. Importantly, an entity shall not be considered an originator for these purposes where it has been established or operates for the sole purpose of securitising exposures. This “sole purpose” test can be particularly challenging in a fund context, where identifying an eligible risk retainer within complex fund structures requires careful bespoke analysis to ensure that the retaining entity has sufficient economic substance and was not established solely for the purpose of securitisation.

Transparency and reporting. Article 7 of the EU Securitisation Regulation imposes transparency obligations on the originator, sponsor and SSPE, requiring them to make specified information available to holders of securitisation positions arising from private securitisations, competent authorities and (upon request) potential investors. This includes: (i) information on the underlying exposures on a quarterly basis; (ii) all essential transaction documentation; (iii) a transaction summary covering the structure, exposure characteristics, cash flows, loss waterfall, credit enhancement and liquidity support features, voting rights, and a list of triggers and events that could materially impact performance; (iv) quarterly investor reports containing materially relevant data on credit quality and performance, information on events that trigger changes in payment priorities or counterparty replacement, data on cash flows generated by the underlying exposures and by the liabilities of the securitisation, and information on the risk retention modality applied; and (v) notification without delay of any significant events, such as material breaches, changes in structural features or risk characteristics, or material amendments to transaction documents. Whilst these requirements are extensive, asset managers have been able to adapt, including by engaging third-party service providers to assist with the production of mandatorily required reports.

Documentary provisions. In the financing documents, the EU Securitisation Regulation requirements described above will typically be reflected in representations and covenants given by the fund parties. Breach of these provisions may not benefit from cure periods, given the severe consequences for lenders as non-compliant securitisations may notably attract additional regulatory capital requirements.

Commercial rationale for securitisation structures

The increasing use of securitisation techniques in the NAV financing market reflects clear commercial advantages:

• Higher advance rates compared to traditional NAV facilities
• Access to broader investor pools, including insurers and pension funds
• Improved capital efficiency for banks through more favorable regulatory treatment
• Rating-driven market access, facilitating institutional participation

For lenders, these structures can materially reduce capital consumption; for funds, they enhance leverage capacity and funding flexibility.

3. Regulatory and market developments

Integration with SRT and structured credit markets

A notable trend is the growing interaction between fund finance and the significant risk transfer (SRT) market.

Banks are increasingly exploring for their fund finance facilities:

• repackaging structures;
• synthetic or true sale transactions; and
• balance sheet optimisation techniques.

These approaches allow lenders to manage capital constraints while opening exposure to a broader institutional investor base.

AIFMD II

The implementation of AIFMD II²  across the EU is expected to significantly impact the private credit funds market. AIFMD II introduces, for the first time, a harmonised EU framework for loan-originating funds (“LOFs”). Under the new rules, a LOF is defined as an AIF (i) whose investment strategy is primarily to originate loans (directly or indirectly through a third party or SPV that originates loans for or on behalf of the AIF or its AIFM, where the AIF or AIFM is involved in structuring, defining or pre-agreeing the loan characteristics prior to gaining exposure), or (ii) where the notional value of loans originated by the AIF amounts to at least 50% of its NAV.

From a leverage perspective, AIFMD II imposes caps based on whether the LOF is open-ended (175%) or closed-ended (300%), with exposure measured under the commitment method relative to NAV. LOFs must also satisfy a 5% risk retention requirement in respect of any loans they originate and later sell to third parties.

These constraints are likely to incentivise managers to introduce leverage outside the fund perimeter. Structuring options may include portfolio-level financing vehicles or joint venture arrangements with institutional investors to try to avoid having the full leverage attributed to the fund.

4. Practical structuring considerations

For market participants, several issues should be addressed early:

1. Regulatory classification: whether the structure constitutes a securitisation should be determined at the outset.
2. Leverage limits: whether the contemplated structure is compliant with and allows optimal use of leverage limits imposed by relevant regulations such as AIFMD II.
3. Risk retention design: in some circumstances, identifying an eligible retaining entity requires careful analysis of fund structure and substance.
4. Jurisdictional structuring: SSPE location must comply with regulatory constraints.
5. Operational readiness: transparency and reporting obligations can be significant and require robust infrastructure.

Conclusion

The convergence between NAV financing and securitisation is now a defining feature of the private credit market.

For market participants, this convergence offers:

• enhanced financing capacity and broader funding sources for funds;
• capital optimisation opportunities for banks; and
• structured access to private credit for institutional investors.

However, these benefits come with increased regulatory complexity. Successful execution requires early-stage analysis, disciplined structuring and a coordinated approach across fund finance and securitisation expertise.

Looking ahead, the implementation of AIFMD II and continued innovation in structured credit markets are likely to accelerate this trend further.