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By: Clare Cottle, Michael Gustafson, Amy Kennedy, Ryan Kim, Ranesh Ramanathan, Andrew Sagor, Fergus Wheeler, and Paul Yin from US law firm Akin Gump Strauss Hauer & Feld LLP.

As private credit continues its rise as a key source of flexible capital for traditional private equity, there has been a growing focus by credit funds on the use and role of side letters in financing transactions. In many cases, credit funds (and, increasingly, traditional bank lenders) rely on side letters to address internal investment committee requirements, deal with institutional specific issues, and manage documentary risk concerns, without upsetting the broader dynamic between the Sponsor and lender group and putting the relationship between fund and Sponsor at stake.

If documented correctly, there are many benefits to using a side letter, not least the time and cost saving of negotiating additional assurances and protections bilaterally. However, it is important to recognise that documenting key financing terms outside the credit agreement creates its own issues. We have outlined a few of those issues below (along with a few practical points to consider):

Enforcement: In most cases, a side letter will include a specific paragraph stating that it is not a "finance document" for the purposes of the credit agreement. This avoids the need to involve every lender in the negotiation process and prevents other lenders amending the side letter without the relevant fund&#......................

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