Presenting a live 75‐minute webinar with interactive Q&A

Agreements Among Lenders in Unitranche Agreements Among Lenders in Unitranche Loan Facilities: Legal IssuesMaximizing Recovery for First‐Out and Last‐Out Lenders in Event of Default or Bankruptcy

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, NOVEMBER 29, 2012

Today’s faculty features:

Nicholas Whitney, Partner, Richards Kibbe & Orbe, New York

Michael Friedman, Partner, Richards Kibbe & Orbe, New York

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The Unitranche FacilityThe Unitranche Facility

Presented by

Nicholas Whitney and Michael Friedman

Date

o a y a d a d a

November 29, 2012

What is a Unitranche Facility?What is a Unitranche Facility?

• Used in middle market club deals

U lik fi t li / d li f ilit d t d • Unlike a first-lien / second-lien facility, documented within a single credit agreement and single set of security documents

• Single lien on the borrower’s collateral with intercreditor arrangements set forth in an “Agreement Among Lende s” (“AAL”)Among Lenders” (“AAL”)

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Advantages of the Unitranche FacilityAdvantages of the Unitranche Facility

• Speed and efficiency of documentation and negotiationnegotiation

• Ability to close quickly is key in the acquisition context

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Structure of a Unitranche FacilityStructure of a Unitranche Facility

• “First out / last out” waterfall concept

• Borrower pays a single blended interest rate and AAL allocates interest payments disproportionately among allocates interest payments disproportionately among lenders

• Single administrative/collateral agent acting on behalf f th l dof the lenders

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Payment WaterfallPayment Waterfall

• Mandatory and optional payments are paid ratably to each tranche prior to a “Waterfall Trigger Event”

• First-out lenders receive payment priority on principal and interest h f f llupon the occurrence of a Waterfall Trigger Event

• Waterfall Trigger Events often include:• Payment default under the credit agreement

• An Event of Default and the election of the Required Lenders to accelerate

• Bankruptcy and insolvency events

P t t f ll li it d t d f ll t l• Payment waterfall limited to proceeds from collateral

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Voting RightsVoting Rights

• AAL typically sets forth voting arrangements among the first-out and last-out lenders

• “Required lender” consent will be modified to reflect • Required lender consent will be modified to reflect voting arrangements between the first-out and last-out lenders

M j it ti ithi t h l i • Majority voting within a tranche may also require a minimum number of lenders

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Buy Out OptionsBuy-Out Options

• AAL often includes a reciprocal buy-out right for first-out and last-out lenders

B t ll t i l d ll t t di • Buy-out generally must include all outstanding obligations

• Turnover of prepayment premiums may be required Turnover of prepayment premiums may be required within a certain period of time

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Buy Out Options (continued)Buy-Out Options (continued)

• Common buy-out triggers:• Payment default

• Exercise of remedies

• Bankruptcy/insolvency proceedings

• Notification of a Waterfall Trigger Event from first-out lenders

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Rights of First OfferRights of First Offer

• Lenders to offer assignments of loans to other lenders prior to making such assignment to a third party

• ROFOs can vary in scope and size

• Lenders should be mindful of these provisions and the impact on the liquidity of their loans

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Exercise of RemediesExercise of Remedies

• Credit agreement typically provides for required lender direction of enforcement actions

• Disputes may occur if the parties violate the voting agreement in the AAL

• AAL may set forth provisions for the exercise of remediesremedies

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Exercise of Remedies (continued)Exercise of Remedies (continued)

• AAL will often include standstill provisions governing the exercise of remedies

• Required first-out lenders may be subject to a standstill before • Required first out lenders may be subject to a standstill before the agent will exercise remedies to give time for a buy-out

• Required last-out lenders may be subject to a traditional second-lien style standstill• Standstill period may vary, but typically in the 90 day range

• Standstill typically has exceptions for filing of defensive pleadings

• Alternatively the AAL may provide for the first-out y y plenders and last-out lenders to act together upon request by the other class of lenders to exercise remedies

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Enforcement of AALs in BankruptcyEnforcement of AALs in Bankruptcy

• Common first-lien / second-lien intercreditor bankruptcy provisions may be included in AALs

Th it h f ilit i l ti l t k t • The unitranche facility is a relatively recent market innovation and has not been tested in bankruptcy

• Case law regarding the interpretation of intercreditor Case law regarding the interpretation of intercreditor agreements may provide guidance with respect to the interpretation of AALs in bankruptcy

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Basis for Enforcement of Intercreditor Arrangements

• §510(a) of the Bankruptcy Code provides for the enforcement of subordination agreements to the extent enforceable under state law

• Bankruptcy Courts have generally enforced first-lien / second-lien intercreditor agreements as valid and enforceable subordination agreements

• Questions arise when intercreditor agreements purport to do more than simply subordinate liens or claims, but that affect so-called “fundamental rights” such as transfers or waivers gof voting rights or rights of creditors to take actions as unsecured creditors

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Will Bankruptcy Courts Apply the p y pp yProvisions of the AAL?

• Courts may view the terms of the AAL as analogous to intercreditor agreements and uphold the rights of first-out and last-out lenders

• Courts may, however, focus on the terms of the unitranchefacility without regard to the AAL

• The borrower is not a party to the AAL

• Only the agent can exercise remedies pursuant to the Credit Agreement

• Disputes between first-out and last-out lenders may be viewed as purely intra-creditor disputes that the borrower did not consent to and order that such disputes be resolved outside of bankruptcy court

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Unsecured Creditor RemediesUnsecured Creditor Remedies

• Last-out lenders typically retain their rights to exercise unsecured creditor remedies in the AAL

• Bankruptcy courts have generally upheld similar • Bankruptcy courts have generally upheld similar second-lien provisions found in intercreditoragreements

A i b k t t i ff t t th AAL • Assuming bankruptcy courts give effect to the AAL, these rights are likely to be enforced

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Adequate ProtectionAdequate Protection

• Secured creditor is entitled to “adequate protection” to the extent of use and/or diminution in value of collateral

• Traditional first-lien /second-lien context• Separate legal obligations of the borrower to the first-lien and

second-lien lenderssecond lien lenders

• Collateral protection measured against each of the first-lien and second-lien debt obligations separately

• First lien could “drag” the second lien along with respect to use • First lien could drag the second lien along with respect to use of shared collateral and provision of adequate protection

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Adequate Protection (continued)Adequate Protection (continued)

• Unitranche context• Single legal obligation of the borrower for both tranches

Value of collateral may be less likely to support both tranches • Value of collateral may be less likely to support both tranches, making it more difficult for a borrower to provide adequate protection for all unitranche lenders

• Unclear as to whether borrower would have to demonstrate all unitranche lenders are adequately protected as borrower’s legal obligation is to all lenders, or just to first-out lenders on account of the AAL

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Post Petition InterestPost-Petition Interest

• Secured creditor must be oversecured

• Traditional first-lien / second-lien context• Separate legal obligations of the borrower to the first-lien and

second-lien lenders

• First-lien collateral measured against the first-lien debt obligationsobligations

• Second-lien collateral measured against the aggregate of the first-lien and second-lien debt obligations

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Post Petition Interests (continued)Post-Petition Interests (continued)

• Unitranche context• Single legal obligation of the borrower for both tranches

• Value of collateral in each case would be measured against the Value of collateral in each case would be measured against the entire facility

• First-out lenders who would otherwise be oversecured in a first-lien / second-lien structure could be in a first lien / second lien structure could be undersecured in a unitranche structure

• First-out lenders may be unable to get the benefit of post-petition interest payments from last-out lenders post-petition interest payments from last-out lenders absent a carefully crafted turnover provision

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Voting on a Plan of Reorganization: g gClassification

• It is unclear whether bankruptcy courts would view first-out and last-out lenders as separate tranches due to the nature of the unitranche facilityy

• Lenders’ claims emanate from a single loan agreement

• Single agent is responsible for taking enforcement actions for each tranche

• Lenders vote as one group even following an event of default

• On the other hand, §510(b) of the Bankruptcy Code provides that subordination agreements are provides that subordination agreements are enforceable

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Voting on a Plan of Reorganization: g gImplications of Classification

• If first-out and last-out lenders are viewed as a single class then §1123(a)(4) of the Bankruptcy Code requires that all claims receive the same treatment

• Single class treatment could make it more difficult for debtors to formulate a reorganization plan or obtain exit financing

• Last-out lenders could have a plan blocking position if they control more than one-third of the aggregate loans

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Voting on a Plan of Reorganization: g gWaivers

• Last-out lenders may waive certain voting rights depending on the negotiating dynamics

• Enforcement of these waivers is subject to uncertainty • Enforcement of these waivers is subject to uncertainty in the courts

• Some courts have declined to enforce voting rights t d b j i l d t i l dgranted by junior lenders to senior lenders

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The Future of Unitranche LoansThe Future of Unitranche Loans

• Unitranche loans have become an important source of financing in the middle market

• Unitranche loans offer timing and simplicity advantages to U t a c e oa s o e t g a d s p c ty ad a tages toborrowers

• AALs have not been tested in courts and could post particular challenges in bankruptcyp g p y

• Evolution of case law in the intercreditor context may prove instructive until AALs reach the courts

• AALs must be drafted with precision by counsel to first-out • AALs must be drafted with precision by counsel to first-out and last-out lenders to minimize risks

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Nicholas A. WhitneyNew York OfficeT: 212.530.1956 | F: 971.344.8956nwhitney@rkollp.com

Practice AreasCorporate and Business Transactions• Lending Transactions

Restructuring and Bankruptcy• Rescue, DIP and Exit Transactions

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Nicholas A. Whitney specializes in lending transactions in both the non-investment grade and investment grade companies. He represents banks, investment banks, hedge funds and other financial institutions in connection with direct lending, as well as investments in syndicated loans in the secondary market. Mr. Whitney has extensive experience representing lenders in senior secured, first lien and second lien loan transactions, unsecured transactions p p g , ,and subordinated loan transactions. He regularly advises lenders in acquisition financings, cash-flow and asset based transactions, special situations and middle market lending. He also has experience with reorganizations and workouts, including in connection with debtor-in-possession facilities and Chapter 11 exit facilities. Recent transactions include:

• Represented a major investment bank’s middle-market lending division in connection with $60 million of first lien financing provided to a publishing company;

• Represented a prominent hedge fund in connection with a $45 million second lien credit facility provided to an • Represented a prominent hedge fund in connection with a $45 million second lien credit facility provided to an office imaging distributor;

• Represented a major investment bank in connection with $82 million of senior secured syndicated credit facilities provided to the investment bank in connection with the investment bank’s leveraged buy-out of a Mexican cinema company;

• Represented a prominent hedge fund in connection with a $20 million debtor-in-possession financing provided to an energy company;

• Represented a major investment bank in connection with a $30 million debtor-in-possession financing provided to Represented a major investment bank in connection with a $30 million debtor in possession financing provided to a power generating facility;

• Represented a major investment bank in connection with a restructuring of a $54 million facility provided to a newspaper publishing company;

• Represented a prominent hedge fund in connection with the restructuring of a $1.2 billion facility provided to a wireless services provider; and

• Represented a prominent hedge fund in connection with a $20 million delayed draw term loan to a gaming company.

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p y

P ti AMichael FriedmanNew York OfficeT: 212.530.1846 | F: 971.344.8846mfriedman@rkollp.com

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Practice AreasCivil Litigation• Creditors’ Rights and Bankruptcy LitigationCorporate and Business TransactionsDistressed Debt and Claims Trading

• Lending Transactions

Regulation and Compliance• Corporate Governance•Operational AdviceRestructuring and Bankruptcy• Creditors’ Rights and Restructurings•Distressed Acquisitions•Rescue, DIP and Exit Financing

Michael Friedman specializes in bankruptcy and restructuring transactions. Mr. Friedman represents hedge funds, investment banks and financial institutions in connection with event driven investment, financing and acquisition transactions. Mr. Friedman’s broad experience in the areas of bankruptcy, restructuring and finance allows him to help clients structure transactions in a manner that will allow them to achieve their business objectives in the most efficient and cost effective manner. Mr. Friedman’s practice involves the representation of investors in distressed acquisitions, purchases of assets in chapter 11 proceedings or “363 sales,” debtor-in-possession financings rescue or bridge financings and chapter 11 exit financings Mr Friedman represents secured and unsecured creditors in all aspects of

, g

possession financings, rescue or bridge financings and chapter 11 exit financings. Mr. Friedman represents secured and unsecured creditors in all aspects of complex chapter 11 bankruptcy reorganizations and out-of-court restructuring transactions. Mr. Friedman also provides real-time focused legal analysis and advice to investors contemplating investments in distressed opportunities. Illustrative representations include: • Represented Debtors Nutrition 21, Inc. and Nutrition 21, LLC in connection with their filing for bankruptcy protection in the Southern District of New York and the sale of substantially all of their assets pursuant to a Section 363 sale and the successful confirmation of a plan of reorganization approximately four months following the filing• Represented Resort and Spa Company in connection with the restructuring of its first lien and mezzanine debt and the recapitalization of the Company• Represented ad hoc groups of bondholders in connection with restructurings of bonds and convertible notes Represented ad hoc groups of bondholders in connection with restructurings of bonds and convertible notes • Represented group of institutions and funds that were counterparties to open confirmations for the purchase and sale of bank loans from or to Lehman in connection with the Lehman bankruptcy proceeding • Represented private funds in multiple purchases of assets pursuant to section 363 sale process • Represented lead investor in connection with the purchase of senior secured loans and origination of DIP Loan to energy producer in chapter 11 proceedings and the subsequent acquisition of substantially all of the assets of the company • Represented lead investor in acquisition of majority equity stake in heating oil delivery Company through the conversion of its debt to equity in chapter 11 reorganization reorganization • Represented private fund in connection with the acquisition through a 363 sale process, of an Italian subsidiary of U.S. company specializing in medium and high voltage drives and controls • Represented private fund in the consensual foreclosure of senior secured loans to company with U.S. and foreign subsidiaries resulting in the ownership of substantially all of the assets of the company • Represented institutional investor in connection with $75 million lease rejection claims against automotive parts manufacturer in chapter 11 proceedings Mr. Friedman is a member of the American Bankruptcy Institute, and also a member of the Turnaround Management Association. Mr. Friedman often participates

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and moderates panels at national and international bankruptcy and distressed investing conferences.

The information contained in this presentation is provided for informational purposes only and should not beconstrued as legal advice on any subject matter. This presentation is not intended to create an attorney-clientrelationship between you and RK&O, and no recipients of content from this presentation, clients or otherwise, shouldact or refrain from acting on the basis of any content included in the presentation without seeking the appropriatel l th f i l d i th ti l f t d i t t i f tt li d i thlegal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in therecipient's state. The content of this presentation contains general information, and may not reflect current legaldevelopments, verdicts or settlements in your jurisdiction or that are relevant to any specific set of facts. RK&Oexpressly disclaims all liability in respect to actions taken or not taken based on any or all of the contents of thispresentation.

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