latham watkins second lien loans

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1 Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership © Copyright 2003 Latham & Watkins. All Rights Reserved. Everything You Always Wanted To Know About Second Lien Financings A LATHAM & WATKINS PRESENTATION May 19, 2004

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Page 1: Latham Watkins Second Lien Loans

1Latham & Watkins operates as a limited liability partnership wor ldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership ©Copyright 2003 Latham & Watkins. All Rights Reserved.

Everything You Always Wanted To Know About

Second Lien Financings

ALATHAM & WATKINS

PRESENTATION

May 19, 2004

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Speakers

James Chesterman Peter M. GilhulyBanking and Leveraged Finance Group Insolvency Group Latham & Watkins, London Office Latham & Watkins, Los Angeles Office +44.20.7710.1004 212.891.8720 [email protected] [email protected]

David G. Crumbaugh Marc P. HanrahanBanking and Leveraged Finance Group Banking and Leveraged Finance Group Latham & Watkins LLP, Chicago Office Latham & Watkins LLP, New York Office312.876.7660 212.906.2976 [email protected] [email protected]

Kirk A. Davenport David S. HellerCorporate Finance Group Insolvency GroupLatham & Watkins LLP, New York Office Latham & Watkins LLP, Chicago Office212.906.1284 [email protected] [email protected]

Page 3: Latham Watkins Second Lien Loans

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What Are We Going to Cover Today

• The Various Flavors of Second Lien Financings• The Pros and Cons From All Perspectives• “Debt” Subordination vs. “Lien” Subordination• What Makes Secured Creditors So Special?• What Makes a “Silent Second” Silent (and What are the

Practical Implications)?• Some Common Real World Scenarios• How Do We Document These Transactions?• Conclusions

Page 4: Latham Watkins Second Lien Loans

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The Various Flavors of Second Lien Financings

• We are here to talk about the two most common versions• Second Lien High Yield Bonds• Second Lien Term Loans

• We will not discuss some of the more esoteric flavors (seller paper, sponsor loans, distressed/rescue paper)

• We will not discuss secured mezzanine financings

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The Various Flavors of Second Lien Financings

• Second Lien Bonds• Often called “Secured Senior Notes” or “Second Lien Secured

Notes,” these creatures are just like any other high yield bonds – except they are secured

• No “maintenance” covenants or cross default provisions• Key covenant differences from an unsecured high yield deal

include• Hard dollar cap on future first lien debt• Very tight ratio limiting future second lien debt• In other words, the liens covenant becomes the key limitation

on future debt incurrence, not the debt covenant- future unsecured debt may only be a hypothetical

possibility for some time

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The Various Flavors of Second Lien Financings

• Second Lien Term Loans• Investors are usually typical Term Loan B purchasers (e.g.,

hedge funds)• Maturity longer and certain other economic terms are richer

than typical Term Loan B paper• Covenants are “lighter” than first lien debt:

• Sometimes very close to high yield covenants• Other times, it’s the 1st lien covenant package ratcheted back• There will always be a limit on the amount of 1st lien debt (may

include a “cushion”)• Financial covenants – fewer in number and less restrictive

than 1st lien debt

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The Various Flavors of Second Lien Financings

• Second Lien Term Loans (cont’d)• Mandatory prepayments – same categories as 1st lien

mandatory prepayments, but no mandatory prepayments required on 2nd lien debt so long as 1st lien debt requires that such mandatory prepayment be applied to 1st lien debt

• Not cross-defaulted to 1st lien debt until passage of 45-90 day period; in some “bond like” deals, only cross-acceleration/cross payment default

• Change of control often cast as “put option” rather than event of default

• Prepayment premiums often apply (but better from the borrower’s perspective than typical high yield bonds)

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Market Data

• There has been exponential growth in the second lien financing market in the last year

• Second lien loans raised over $5.23 billion in the first four months of 2004, compared with approximately $3.26 billion for all of 2003

• Volume of second lien loans for the first four months of 2004 was almost double the total deal volume for 2003, increasing from 26to 49 deals

• The increase in second lien bond deals has also been dramatic (although somewhat less astronomical)

Source: Standard & Poor’s / Leveraged Commentary & Data

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Volume and Number of Second Lien Loans 1997-2004

Volume

195

690394

140 65

570

6122

3256

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1997 1998 1999 2000 2001 2002 2003 2004

In M

illio

ns

1/1- 5/13 5/14-12/31

Number

2

912

53 3

26

57

0

30

60

1997 1998 1999 2000 2001 2002 2003 2004

1/1- 5/13 5/14-12/31

Source: Standard & Poor’s / Leveraged Commentary & Data

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Average Deal Size of Second Lien Loans 1997 – 5/13/2004

$68

$104$90

$116

$28

$125

$190

$22

$98

$33

$0

$100

$200

$300

1997

1998

1999

2000

2001

2002

2003

4Q03

1Q04

4/1-5/

13/04

Source: Standard & Poor’s / Leveraged Commentary & Data

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2.3 2.12.8 2.9

1.3 1.5

1.4 1.10.1 0.2

0.30.5 0.5

0.50.14.2 4.2

5.14.5

0.3

0.0x

2.0x

4.0x

6.0x

8.0x

2003 (26) 4Q03 (12) 1Q04 (30) 4/1-5/13/04(19)

First Lien Bank Debt Second Lien Bank Debt Other Senior Debt Sub Debt

Average Debt/EBITDA Ratio for Transactions with Second Lien Loans 2003

4/1/2004 to 5/13/2004

Source: Standard & Poor’s / Leveraged Commentary & Data

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Recent Precedent

Company Transaction Date

Midwest Generation, LLC $1,000,000,000 8.75% Second Priority Senior Secured 2004Notes due 2034

U.S. Security Holdings, Inc. $146,000,000 First and Second Lien Credit Facilities 2004

Calpine Generating Company LLC $1,705,000,000 First Priority Secured Floating Rate Notes due 2009 2004Second Priority Secured Floating Rate Notes due 2010Third Priority Secured Floating Rate Notes due 201111.5% Third Priority Secured Notes due 2011

Transwestern Publishing Company, LLC $665,000,000 First and Second Lien Credit Facilities 2004

Cebridge Connections, Inc. $350,000,000 Senior Secured First and Second Lien Term Loan 2004

Plastech $50,000,000 Senior Secured Second Lien Term Loan 2004

Playtex Products, Inc. $460,000,000 8% Senior Secured Notes due 2011 2004

Carmike Cinemas, Inc. $150,000,000 Senior Secured First and Second Lien Credit 2004Facilities

American Casino & Entertainment $215,000,000 7.85% Senior Secured Notes due 2012 2004

NRG Energy, Inc. $475,000,000 8.00% Second Priority Senior Secured Notes due 2013 2004

Tri-State Outdoor Advertising $50,000,000 Senior Secured First and Second Lien Credit Facilities 2004

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Recent Precedent

Company Transaction Date

Atlantic Express Transportation Corp. $115,000,000 12% Senior Secured Notes due 2008 and Senior 2004Secured Floating Rates Notes due 2008

Tensar $112,000,000 Secured First Lien Secured Second Lien Facilities 2004

Leedsworld $93,000,000 Secured First Lien Secured Second Lien Facilities 2004

Ranpak $140,000,000 Secured First Lien and Secured Second Lien Facilities 2004

Roller Bearing $220,000,000 Secured First Lien and Secured Second Lien Facilities 2004

Cognis Deutschland GmbH& Co. KG € 745,000,000 Floating Rate Second Lien Notes due 2013 2004and Senior Notes due 2014

Mueller Group, Inc. $100,000,000 Second Priority Senior Secured Floating Rates due 2011 2004

Nellson Neutraceuticals $360,000,000 First and Second Lien Term Loans 2004

Holland USA $92,500,000 Secured First Lien and Secured Second Lien Facilities 2003

NRG Energy, Inc. $1,250,000,000 8% Second Priority Senior Secured Notes due 2013 2003

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Recent Precedent

Company Transaction Date

American Reprographics Company, LLC $355,000,000 First and Second Lien Credit Facilities 2003

Calpine Corporation $400,000,000 9.875% Second Priority Senior Secured Notes due 20032011

Dynegy Holdings Inc. $300,000,000 9.875% Second Priority Senior Secured Notes due 2010 200310.125% Second Priority Senior Secured Notes due 2013

Advanstar Communications, Inc. $70,000,000 10.75% Second Priority Senior Secured Notes due 2010 2003

Calpine Construction Finance Company, L.P. $365,000,000 Second Priority Senior Secured Floating Rate Notes 2003due 2011

Holland USA $66,500,000 Secured First Lien and $26,000,000 Secured Second Lien 2003Facilities

Venetian Macau, S.A. $120,000,000 Tranche A Floating Rate Senior Secured 2003Notes due 2008, Tranche B Floating Rate Senior SecuredNotes due 2008

Advanstar Communications, Inc. $360,000,000 Second Priority Senior Secured Floating Rate Notes 2003due 2008, 10.75% Second Priority Senior Secured Notes due 2010

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Recent Precedent

Company Transaction Date

Dynegy Holdings Inc $1,450,000,000 Second Priority Senior Secured Floating Rate Notes 20032008, 9.875% Second Priority Senior Secured Notes due 2010,10.125% Second Priority Senior Secured Notes due 2013

Calpine Corporation $2,550,000,000 Second Priority Senior Secured Floating Rate Notes 2003due 2007, 8.5% Second Priority Senior Secured Notes due 2010, 8.75% Second Priority Senior Secured Notes due 2013

Dayton Superior Corporation $165,000,000 10.75% Senior Second Secured Notes due 2008 2003

O’Sullivan Industries $100,000,000 10.63 % Senior Secured Notes due 2008 2003

Environmental System Products, Inc. $300,000,000 Senior Secured First and Second Lien Credit 2003Facilities

Wynn Las Vegas, LLC and Wynn $370,000,000 12% Second Mortgage Notes due 2010 2002Las Vegas Capital Corp.

Venetian $850,000,000 11% Mortgage Notes due 2010 2002

Transportation Technologies $265,000,000 Senior Secured First and Second Lien 2002Facilities

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The Pros and Cons of Second Lien Financings(The Company’s Perspective)

• Why would a company ever want to give collateral to its junior creditors?

• Better interest rate • Better market access

• May be only way to get deal done• Why would a company not want to do a second lien deal?

• Limits future financing options• Cap on future first lien debt• Strict limit on future second lien debt • Practical limitation on future unsecured debt

• Incremental transaction costs

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The Pros and Cons of Second Lien Financings(The Senior Bank’s Perspective)

• Historically, first lien creditors have enjoyed exclusive control of collateral

• First lien creditors are naturally inclined to object to sharing “their” collateral with junior creditors

• First lien creditors fear that second lien creditors may assert rights that will interfere with their ability to call theshots and realize value in the collateral

• They never want to wake up in a distress scenario and wish they didn’t have to deal with second lien creditors’ competing interests

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The Pros and Cons of Second Lien Financings

(The Senior Bank’s Perspective)

• First Lien Creditors, given the choice, would prefer debt subordination (to be discussed) to lien subordination

• However, if their exposure is reduced, they can get to yes• They may be getting paid down with the proceeds of the second

lien deal• They may only get to yes if the second lien is a “silent second”

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The Pros and Cons of Second Lien Financings (The Second Lien Creditor’s Perspective)

• Second Lien Creditors Will Accept a “Silent Second” Lien Because it is Better to be Secured than Unsecured

• Black letter bankruptcy law provides that you are entitled to the “value of your interest in”collateral in bankruptcy

• Secured creditors collect ahead of the trade and other unsecureds (to the extent there is value in their interest in the collateral)

• Secured creditors can get post-petition interest if they are oversecured

• Secured creditors have better rights in bankruptcy (even though some of those rights may be waived as part of making the lien a “silent” second)

• Bottom line: secured creditors recover more in bankruptcy than unsecured creditors

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Debt Subordination vs. Lien Subordination

• What are the key differences?• Debt subordination involves an agreement to turn over to

holders of “senior debt” everything received from the borrower from any source

• Debt subordination also typically includes payment blockageprovisions

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Debt Subordination vs. Lien Subordination

• What are the key differences?• Lien subordination only requires turnover to first lien creditors of

proceeds of shared collateral• There is no payment blockage in typical second lien deals

• Waiver of rights is generally confined to the special rights of secured creditors relating to collateral only

• Rights of unsecured creditors are specifically preserved (with a few narrow exceptions)

• Antilayering covenants in existing high yield debt may only restrict debt subordination and not lien subordination

• Depends on exact wording of covenant (subordinated “in right of payment” vs. “in any respect”)

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What Makes Secured Creditors So Special?

• Pre-bankruptcy• Right to foreclose and realize value

• This remedy is almost never consummated, but its existence creates negotiating power

• In bankruptcy• Priority vis-à-vis trade and other unsecured creditors• Post-petition interest• “Adequate protection” rights• Harder to be “crammed down”• Right to credit bid• More leverage in plan negotiations

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What Makes Secured Creditors So Special?

• In Bankruptcy• “Adequate protection” rights entitle a secured creditor to

protection against diminution in the value of its collateral during a bankruptcy

• “Adequate protection” rights are very broad and crop up in a variety of circumstances

• Right to object to mischief relating to collateral• Right to object to uses of cash collateral• Right to object to sales of collateral• Leverage to prevent/modify DIP financing• Right to request current payment of post-petition interest

• “Adequate protection” is where much of the action is in these intercreditor discussions

Page 24: Latham Watkins Second Lien Loans

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What Makes a “Silent Second” Lien Silent?

• Second lien creditors must agree by contract to give up some of their rights

• General idea is to preserve whatever rights you would have had as an unsecured creditor but defer to the first lien creditors as to how to exercise the special rights of secured creditors

• First lien creditors want to “drive the bus”• Second lien creditors want to make sure that in allowing 1st lien

creditors to drive the bus the interests of 2nd lien creditors are not unfairly disregarded

• The collateral trust agreement or intercreditor agreement will spell out just how silent is “silent”

• This is where the flashpoints are in negotiations

Page 25: Latham Watkins Second Lien Loans

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What Makes a “Silent Second” Lien Silent?

• There is some consensus in both the bond and the term loan markets about the extent to which second lienholders should waive their secured creditor rights

• There are some areas that are still hotly contested• Adequate protection waivers• Scope and duration of enforcement standstills• Waiver of right to vote in bankruptcy

• The bond market conventions are more settled than the term loan market conventions

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What Makes a “Silent Second” Lien Silent?

Waiver often expires after 90-180 days

Typically waived until 1st lien debt is paid in full

Waiver of right to exercise remedies against collateral

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• First lien banks “drive the bus” (at least for a while)• Term loans may get into the mix after standstill expires• Company is more likely to be pushed into bankruptcy after

standstill expires

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What Makes a “Silent Second” Lien Silent?

Waiver almost always given

Waiver almost always given

Waiver of right to challenge first liens

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Not a significant concession by the second lien holder since

challenging the first liens is probably a dangerous game• People in glass houses shouldn’t throw stones

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What Makes a “Silent Second” Lien Silent?

Waiver almost always given

Waiver almost always given

Waiver of right to oppose adequate protection for 1st

lienholders

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Not a significant concession

• Second lienholders want to see first lien debt get paid• Second lienholders should have “tag along” rights if first lien

creditors obtain new collateral

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What Makes a “Silent Second” Lien Silent?

Sometimes waived, but may be a fiercely negotiated point

Typically waived until 1st lien debt is paid in full (subject to “tag along” rights)

Waiver of right to seek adequate protection for 2nd lien holders

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Second lienholders should have “tag along” rights to protect liens on

“quick assets” and to reduce opportunities for mischief• This is a very broad waiver and can have real consequences• However, in many cases, if second lienholders have “tag along”

rights and virtually all of the company’s assets are already part of collateral package, this waiver may be acceptable

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What Makes a “Silent Second” Lien Silent?

Advance consent usually given

Advance consent usually given

Advance consent to uses of cash collateral approved by 1st

lienholders

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Use of cash collateral is critical to the company in bankruptcy• First lien lenders will typically negotiate a strict operating

budget as part of their agreement to release cash collateral foruse in the business

• Second lien lenders will not participate in these budget negotiations

• First lien debt will “drive the bus”

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What Makes a “Silent Second” Lien Silent?

Advance consent usually given (if 1st lien creditors “share the pain”) –possibly subject to a hard dollar cap

Advance consent usually given (if 1st lien creditors “share the pain”)

Advance consent to DIP financings approved by 1st lienholders

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Probably not much likelihood of a 2nd lien creditor

successfully objecting to a DIP loan that primes (or is pari passu with) the 1st lien debt if other constituents support it

• Is important to limit advance consent to “share the pain” scenarios

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What Makes a “Silent Second” Lien Silent?

Generally not waivedOften not waived at all. If waived, usually limited to waiver of right to vote for a plan that 1st lien creditors vote down

Waiver of voting rights on a plan of reorganization

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• This waiver is objectionable in that it can cause second lien

creditors to be in a worse position than unsecured creditors in plan negotiations

• Consequences could be very expensive

Page 33: Latham Watkins Second Lien Loans

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What Makes a “Silent Second” Lien Silent?

Automatic release for asset sales that satisfy second lien covenants only. Second lien term lenders want their own “on/off” switch

Automatic release for asset sales that satisfy bond covenants. “On/off” switch often in hands of 1st lienholders even where no asset sale involved (unless “all or substantially all” of collateral at stake). Note TIA issue

Release of second liens outside of bankruptcy

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Not a significant concession in most scenarios

• Second lienholders likely have an “asset sale” covenant that will limit opportunities for mischief

• Unlikely that first lienholders will release any collateral except where they are getting paid down with sale proceeds

• However, possibility for mischief is still present

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What Makes a “Silent Second” Lien Silent?

Advance agreement not to object to collateral sales approved by 1st lien debt

Advance agreement not to object to collateral sales approved by 1st lien debt

Release of second liens during a bankruptcy

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Not a significant concession• 2nd lien creditors would not likely succeed in blocking a

Section 363 sale supported by other constituents• Bankruptcy process and fiduciary duties keep opportunities

for mischief to a minimum

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What Makes a “Silent Second” Lien Silent?

Same as 1st lien debtLimited by Regulation S-X Section 3-16. Also usually includes generous “basket.” Also note Trust Indenture Act Section 314(d) issue

Scope of collateral package

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Failure to obtain subsidiary stock pledges could be

significant, depending on nature of “hard asset” collateral• TIA Section 314(d) is a headache

Page 36: Latham Watkins Second Lien Loans

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What Makes a “Silent Second” Lien Silent?

Sometimes included during limited window following acceleration

Almost never included Right of 2nd lien debt to buy out 1st

lien debt at par plus accrued

Term Loan MarketHigh Yield MarketIssue

Practical Implications:• Not a huge point for either side • If 2nd lien debt has both the will and the means to repay the

1st lien debt at par, a deal will likely be struck without regard to what the documents say

Page 37: Latham Watkins Second Lien Loans

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Some Real World Scenarios

Let’s assume the following fact pattern:• Widgets.com has borrowed $1.0 billion under its first lien bank credit

agreement and issued $1.0 billion of second lien high yield bonds/term loans

• The banks have a “blanket” first lien on all of Widget’s assets except real estate

• The bonds/term loan have a “blanket” second lien on all of Widget’s assets including real estate

• At the time Widgets files for bankruptcy, the collateral is worth $1.5 billion and the real estate is worth $500 million

• In two years, when a plan of liquidation is confirmed, the collateral is sold for $1.2 billion and the real estate is sold for $300 million

Page 38: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #1

• Covenant default occurs on first lien debt• What rights do second lien creditors have?

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Real World Scenarios – Variation #2

• First lien debt holders negotiate with Widgets.com to consensually sell collateral to pay down first lien debt• Can second lien holder object?• What if the assets sold were not part of the

collateral?

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Real World Scenarios – Variation #3

• Payment default occurs under first lien debt• Second lien debt can accelerate (probably)• Unsecured (or undersecured) creditors can put

company into bankruptcy

Page 41: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #4

• Payment default occurs plus 180 days pass• Standstill period expires if second lien debt is term

loan flavor

Page 42: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #5

• Company files for bankruptcy• First day motions are proposed for:

• Use of cash collateral• First lien defensive DIP financing

• What rights do second lien creditors have?

Page 43: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #6

• Company files for bankruptcy and seeks permission to sell inventory in ordinary course of business• First lien debt seeks adequate protection (e.g., asks

court for replacement lien in real estate)• What rights do second lien holders have here?

• To challenge first liens’ adequate protection motion• To assert their own adequate protection rights (“Hey –

what about me?”)

Page 44: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #7

• Company files for bankruptcy• First lien creditors ask for cash payment of post-

petition interest as “adequate protection”• Can second lien creditors object?• Can second lien creditors ask for cash payment of post-

petition interest for themselves during the bankruptcy?

Page 45: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #8

Company files for bankruptcy• First day motion to approve DIP financing by third

party potential acquiror• Motion includes credit bid rights and rights to convert

DIP to equity• What rights to second lien creditors have?

Page 46: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #9

Company files for bankruptcy• Company files first day motion for Kmart-like

mass liquidation• Can second lien creditors object?

Page 47: Latham Watkins Second Lien Loans

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Real World Scenarios – Variation #10

Company files for bankruptcy and elects to sell crown jewel assets under Section 363• First lien creditors can object on Section 363

grounds• What right do second lienholders have?

Page 48: Latham Watkins Second Lien Loans

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How Do We Document These Transactions?

• Collateral Trust Agreement vs. Intercreditor Agreement• Second lien bond deals tend to use collateral trust agreement

because of perceived independence associated with this arrangement

• Second lien term loans tend to use intercreditor agreements because of perceived “control” benefits to first lien holders

• No important substance to this distinction

Page 49: Latham Watkins Second Lien Loans

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How Do We Document These Transactions?

• Special Disclosure Issues in Bond Deals• Risk Factors must explain collateral package• Section 3-16 of Regulation S-X

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Second Liens In Europe: A Different Ball Game

• Banking and capital markets developed differently in Europe, with stronger lead bank relationships, with mezzanine being sole subordinated debt source

• Restructurings generally take place out of court due to different bankruptcy regimes, therefore consensual, leading to greater “hold out” issues

• Second lien loans are predominantly mezzanine in LBOs with relatively standard intercreditor provisions

• Second lien bond market intercreditor positions are still evolving

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Second Lien Loans / Mezzanine

• Originally provided by commercial banks with very few independent mezzanine investors, leading to less negotiation

• Well established market• Guarantee and security package follows senior• Usually includes debt subordination as well as lien

subordination• Identical covenant and default package to senior (backed off

approximately 10%)• Independent waiver and consent rights are typical• Standstill customarily 90-150 days

Page 52: Latham Watkins Second Lien Loans

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Second Lien Bonds – European Style

• Evolution towards US model from historic structurally subordinated deals in telecom sector

• Very few deals (Focus Wickes; Baxi; Cognis); all unregistered

• Intercreditor position still moving around• Guarantee and security package follows senior debt• Payment blockage similar to US high yield market• Standstills vary; mezz style on Cognis; Focus Wickes a

hybrid with permanent standstill on collateral• Unanimity provisions reduced to 90% in Focus Wickes/

Baxi

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SUMMARY - CONCLUSIONS

• If you are the first lien debt:

Must Haves Like to Haves•Control over enforcement actions for •Control over enforcement actionssome period of time forever•Ability to force asset sale free and clear of all liens •Ability to release both first and •Agreement not to object to asset sales second liens outside of bankruptcyin bankruptcy •Agreement not to object to•Ability to put DIP in place any action taken by 1st lien creditors•Ability to obtain adequate protection without •Ability to vote claims of 2nd lien creditorsobjection from 2nd lien debt •Ability to put DIP in place ahead•Agreement not to challenge first liens of 2nd lien debt but behind first lien

debt

Page 54: Latham Watkins Second Lien Loans

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SUMMARY - CONCLUSIONS

Must Haves•Ability to assert rights of an unsecured

creditor•Ability to vote your claims in a

bankruptcy•”Tag along” rights whenever 1st lien

creditors get new collateral

Like to Haves• Limitation on duration of enforcement

standstill• Unfettered adequate protection rights• Right to buy out 1st lien debt at par plus

accrued

• If you are the 2nd lien creditor:

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SUMMARY - CONCLUSIONS

• If you are the company:

Must Haves Like to Haves• Some room for future • Lots of room for borrowing capacity on a future securedsecured basis borrowings (both first and(first or second lien) second lien)

• Lots of roomfor future unsecuredborrowings

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SUMMARY - CONCLUSIONS

• The second lien market is here to stay• Most of the critical intercreditor issues are the subject of a

market consensus (particularly in bond land)• In the term loan market, a number of key issues are not yet

resolved• Duration of enforcement standstill• Extent of waiver of adequate protection rights

• As long as the market continues to reward companies who are willing to provide collateral to their junior creditors, these products will have a place on the corporate finance menu