structuring agreements among lenders in unitranche loan...

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Presenting a live 90-minute webinar with interactive Q&A

Structuring Agreements Among Lenders in

Unitranche Loan Facilities and Overcoming

Bankruptcy-Related Risks Negotiating Tranching, Payment Waterfalls, Interest and Fees,

Voting, Buyouts, Remedial Standstill, and Assignment Provisions

Today’s faculty features:

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

THURSDAY, DECEMBER 15, 2016

Danielle V. Garcia, Partner, Blank Rome, Los Angeles

Kenneth E. Noble, Partner, Holland & Knight, New York and Boston

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Structuring Agreements Among Lenders

Danielle V. Garcia

Blank Rome LLP

[email protected]


Intercreditor Agreement vs AAL

An intercreditor agreement is between two creditors holding two separate liens against the same assets that secure obligations of the same obligor owing under two separate credit facilities

Creditors holding separate liens and owed separate debts have well established rights under the law as secured creditors which affect the actions they may take and their treatment in an insolvency proceeding

The intercreditor agreement alters those rights, and often alters the creditors’ rights under their respective contracts with the obligor, to give priority to one creditor over the other as to all collateral, certain collateral and/or payment rights

Obligor typically signs an acknowledgment to the intercreditor agreement

6


AAL vs Intercreditor Agreement

An AAL is an agreement among lenders that are party to one credit facility under one set of documents with one agent holding the lien on collateral securing all of the obligations owing to the lenders

AAL essentially aims to re-create the relative rights between these lenders as would have existed if they were party to two separate credit facilities, but within a framework where the lenders themselves typically can act only through the agent

The rights of the lenders are governed by the terms of the contract rather than laws applicable to creditors holding separate liens and debts

Obligor typically does not see the AAL terms, other than those that are spelled out in the credit agreement and/or security agreement

7


Types of AALs

The “typical” provisions that are in an AAL vary by the types of priorities they are intended to create and the type of credit facility they govern

First Out/Last Out vs Split Collateral

• One set of lenders has priority over the other with respect to all payments and proceeds of a collateral

• One set of lenders has priority over the other with respect to payments and proceeds of certain collateral

Cash Flow Credit Facilities vs Asset Based Loan Facilities (“ABL Facilities”)

• Cash Flow Facility almost always first out/last out while ABL Facilities can be either first out/last out or split collateral

• Other differences seen based on “precedent” between parties, specific aspects of the deal and the “balance of power”

8


Tranching

Specified portions of the obligations secured by the lien are designated first out or last out, or, for split collateral deals, ABL (or working capital) or term loan

• In an ABL facility the first out or ABL tranche is made up of the revolving obligations and the bank product obligations (if secured under the credit facility)

Can also see the first out or ABL tranche include a portion of the term loan, which most often is tied to specific assets (like certain equipment or real estate) but can also be an “air ball” not tied to specific assets

• The term loan, or the remaining portion of the term loan, is the last out or term loan tranche

This split can be set out only in the AAL or in the credit agreement

• If only in the AAL there is typically just one term loan made under the credit agreement

• If in the credit agreement there is typically a Term Loan A and a Term Loan B

9


Tranching

Limits within the first out or ABL tranche

• Typically there is an overall limit on the revolving and term loan portion with separate limits or sublimits for bank products, “protective advances” and permitted overadvances

• This limit comes into play when determining:

how much of the proceeds of the collateral go to this tranche first

if there is a buy-out right for the last out/term loan lender, how much is paid to purchase the first out/ABL obligations

how much financing the first out/ABL lenders may provide to the obligor in an insolvency proceeding without further consent from the last out/term loan lenders

if the credit facility has provisions allowing for additional debt to be added at the election of the obligor, how much can be provided without consent from the other lenders

10


Tranching

Construction of the limits

• Overall Limit

Usually at 110% of the amount committed/funded at closing, but if the obligor has the option to increase any portion of the first out/ABL tranche, that amount may also be included at 110% of the maximum amount otherwise permitted

In an ABL Facility, may also be limited to a percentage of the borrowing base or availability or otherwise limit the making of permitted overadvances – particularly where the last out/term loan lenders have no voting rights on changes to the borrowing base

In a deal where a new tranche of debt may be incurred under the credit facility at the option of the borrower, may have provisions that limit the amount that can be first out vs. last out based on financial metrics (e.g. maintaining a certain first out vs last out leverage, or maintaining the same ratio of first out to last out debt as existed at closing)

11


Tranching

• Bank Product Limit

Can be limited for certain bank products (such as hedges) and unlimited for others (like basic cash management), or have an overall limit on all bank products

For an ABL Facility, may require that to qualify within the limit, the amount was reserved against the borrowing base

Typically the reserve must have been taken at the time the bank product was provided, but if the credit agreement specifies alternate timing (such as only reserved if there is an event of default or drop in excess availability) that needs to be reflected in the AAL limit

In determining the amount of the cap and whether a reserve is required, need to balance the types of bank products that the obligor wants and the amount of exposure vs the last out/term loan lender’s willingness to be behind those obligations

12


Tranching

• Protective Advances - Advances that the agent can make at its discretion when there is an event of default in order to preserve or protect collateral, enhance the likelihood of repayment of the facility or provide liquidity to the borrower that is not otherwise available under the credit facility. The other applicable lenders have to take their pro rata share of these advances and they have priority in the payment waterfall over all other loans

Usually there is a limit in the credit agreement that the borrower and all applicable lenders agree to, but there will usually also be a limit in the AAL. If there is no limit in the credit agreement, then the limit will be in the AAL

For ABL Facilities, the limit in the credit agreement is usually tied to a percentage of the borrowing base, while in cash flow facilities it’s a set amount

13


Tranching

• Protective Advances (continued)

The AAL limit often permits the first out/ABL lenders to make/authorize protective advances of a certain amount within the overall limit and then permit the last out/term loan lenders to make/authorize the remaining amount

The limit may contemplate that protective advances can be made over the limit if made solely for the account of one group of lenders

Where the AAL is for a split collateral deal, the AAL may also contemplate that protective advances that primarily benefit one group of lenders over the other only have priority in the waterfall the benefits that group of lenders, or that only a certain amount of protective advances (for any purpose) get priority in both waterfalls

14


Payment Waterfalls

Sets out the order in which proceeds of collateral and payments received after specified events are applied to the various secured obligations

Creates de-facto payment subordination when in effect as the borrower cannot elect to pay one set of lenders over the other and only one agent is exercising remedies against collateral and applying those proceeds to the obligations

Payment in full of the elements of the waterfall are stated to be paid without regard to whether such amounts are allowed or allowable in an insolvency proceeding, including the accrual of interest and fees after the commencement of an insolvency – mimics provisions in a typical subordination agreement between two separate debt holders

May state that the waterfall applies only to proceeds of collateral, not payments as well (mimics a typical intercreditor agreement between two separate lien holders)

• Best practice is to include all amounts received by the agent or any lender in respect of the obligations or collateral – including adequate protection payments

15


Payment Waterfalls

If the term loan is split between the first out/ABL lenders and the last out/term loan lenders and that split is only set out in the AAL, the AAL will detail how scheduled payments of the term loan and mandatory and optional prepayments of the term loan are applied

• May go all to the first out/ABL lenders until paid in full and then to the last out/ABL or may be paid ratably to both sets of lenders

• May be applied ratably until the waterfall is triggered, then be applied to the first out/ABL term loans first and the last out/other term loan second

• Needs to also address application of “declined” mandatory prepayments if the credit agreement provides for that

16


Payment Waterfalls

If there is a payment waterfall in the credit agreement, need to ensure that there is not a fundamental conflict with the AAL waterfall, for example

• The AAL waterfall applies after any event of default, but the credit agreement waterfall applies only after certain events of default

• The AAL waterfall is triggered without notice and the credit agreement triggers with notice

If the waterfall or other payment priority provisions are triggered in the AAL while the borrower is not subject to those same provisions under the credit agreement, need to be mindful of presenting statements of account to the borrower that do not conflict with the terms of the credit agreement - particularly if statements of account are not being provided through a single agent

17


Payment Waterfalls

Amounts owing to defaulting lenders are excluded until the end of the waterfall

Typical first out/last out waterfall

• First, costs, expenses and indemnities due to the agent or agents (regardless of whether they are also first or last out lenders)

• Second, fees due to the agent or agents in their capacity as such – but excluding prepayment fees

Note that often in these facilities there is a fee letter where all fees go to the agent and may not be specifically designated as for the benefit of the agent or may specify that all such fees are solely for the benefit of the agent (even though the fees will be split per the AAL)

18


Payment Waterfalls

Typical first out/last out waterfall (continued)

• Third and Fourth, interest and then principal on protective advances (up to the permitted amount of protective advances), applied pro rata to the amounts held by each set of lenders or the agents

• Fifth, expenses and indemnities due to first out lenders

• Sixth, fees due to the first out lenders, other than prepayment fees

• Seventh, ratably to interest due on the principal of the first out loans

• Eighth, ratably to principal of the first out loans and to provide cash collateral for letters of credit and bank products, up to the cap on bank products

• Ninth, expenses and indemnities due to last out lenders

• Tenth, fees due to last out lenders, other than prepayment fees

19


Payment Waterfalls

Typical first out/last out waterfall (continued)

• Eleventh and Twelfth, interest and principal on last out loans

• Thirteenth and Fourteenth, interest and principal on excess protective advances

• Fifteenth, to any prepayment fees owed to first out lenders

• Sixteenth, to any prepayment fees owed to last out lenders

• Seventeenth, ratably to all other obligations, including amounts in excess of the bank product cap

• Eighteenth, ratably to all obligations owing to defaulting lenders

20


Payment Waterfalls

Typical ABL/term loan waterfall

• Creates payment priority for ABL lenders out of ABL priority collateral (accounts receivable, inventory, cash, bank accounts, related assets and proceeds of the foregoing, in each case, to the extent not an identifiable proceed of Term Loan Priority Collateral) and for term loan lenders out of term loan priority collateral (all other collateral).

• If there is shared collateral (typically equity interests of the loan parties) will also detail application of proceeds out of such collateral – may be pari passu, based on book or appraised value of certain assets or mutually agreed by the lenders at the time such proceeds are received

21


Payment Waterfalls

Typical ABL/term loan waterfall

• Similar to first out/last out, except that:

Holders of ABL obligations are paid first out of proceeds of ABL priority collateral, then holders of term loan obligations, with any remaining ABL obligations over any applicable caps paid last

Holders of term loan obligations are paid first out of proceeds of term loan priority collateral, then holders of ABL obligations

Amounts in excess of caps (on protective advances, bank products or on the aggregate principal amount of revolver or term loan obligations are paid after the “priority obligations” for each type of collateral

22


Payment Waterfalls

If ABL obligations include a term loan supported by specific assets:

• May see the ABL collateral include those specific assets in addition to traditional ABL collateral (gives additional cushion for payment of the revolving and “ABL term loan” obligations) or

• Will see the ABL term loan have priority over the other term loan with respect to those specific assets

If ABL obligations include an “air ball” term loan:

• May see that term loan have the same priority assets as the ABL revolver or

• Will see that term loan have priority over the other term loan in the “term loan” waterfall

23


Payment Waterfalls

Triggering of a waterfall - typically will be based on the occurrence of either

• Any event of default and notice from the applicable lenders or

• More often, specific events of default and notice from the applicable lenders

Insolvency, acceleration and actual exercise of remedies should not require notice

Types of triggering events of default

• Acceleration of all or any material portion of the facility

• Actual exercise of remedies against all or a material portion of the collateral

• Issuance of a notice by the applicable lenders to exercise remedies

• Payment event of default – any or with respect to a material amount (if due to an overadvance, typically must be outstanding for a specified period of time)

• Occurrence of any insolvency event of default

• Breach of “first out financial covenants” (e.g. total leverage ratio breach that is also a breach of a first out leverage ratio, fixed charge ratio below a certain level)

• Any event of default while liquidity is also below a specified amount

• Other events of default to which the applicable group of lenders is most sensitive

24


Payment Waterfalls

Which lenders can send notice to activate the waterfall

• Required first out/ABL lenders based on triggering events that affect all lenders or those that particularly affect those lenders (e.g. payment default on first out/ABL obligations, breach of “first out” financial covenants)

• Required last out/term loan lenders based on triggering events that affect all lenders or those that particularly affect those lenders (e.g. payment default on last out/term loan obligations).

• Applicable “required” lenders typically those holding a majority of the applicable obligations, but may also be structured to include a specific lender so long as it maintains a certain hold

Inclusion of a specific lender designed to protect their voting rights, but can operate as a blocking right on activating the waterfall, so may want to permit any lender holding the applicable obligations to issue a notice

25


Payment Waterfalls

Partial waterfalls

• Provides that principal (and sometimes interest) on last out/term loan obligations is deferred as if the full waterfall was in effect, but does not necessarily apply when there is an actual event of default upon which the full waterfall would apply

• Can apply if there is a “first out financial covenant” default, whether at the level that triggers the full waterfall or at a level that is slightly less of an egregious breach of financial covenants

• Can apply if there is an event of default and liquidity is below a certain level, whether at the level that triggers the full waterfall or a slightly higher amount

• Mimics provisions in subordination agreements that permit interest or principal payments only if certain financial tests are met

• Benefit for first out/ABL lenders can be that activating this waterfall does not trigger buy-out right

26


Interest and Fee Skims

Interest Rate Skim

• If tranching of term loan is not in the credit agreement, borrower pays one blended rate of interest on all obligations and the AAL determines the portion paid to each set of lenders

• Interest rate skim may apply only to term loan obligations and not to revolver

May be particularly important if a blended rate of interest results in letter of credit fees that are significantly higher than the borrower could obtain from a third party bank with a cash secured LC

• Interest rate “floors” may go to the benefit of only the last out/term loan lender. Needs to be carefully drafted to capture intent of parties.

27



Interest Rate Skim

• Should expressly state that amounts collected as interest that would otherwise go to the last out/term loan lenders are instead applied per the waterfall if it is in effect

• Should apply to the portion of such interest actually collected by the agent, but may require the agent to charge such interest to the revolver and make payment at that time

Charging to the revolver turns last out/term loan obligations into first out/ABL obligations, so first out/ABL agent should bargain for discretion not to charge the revolver

28



Fees

• Closing fee is typically a specified percentage on the entire facility paid by the borrower and then allocated to the lenders under the AAL based on an agreed percentage for the first out/ABL lenders (paid to them based on their pro rata shares of the commitments/loans) with the remainder going to the last out/term loan lenders (based on their pro rata shares of the term loan)

• Arranger/syndication fee typically retained by the applicable agent acting as such, but may also be split based on an agreed amount if there are two agents

• Annual/quarterly/monthly agency fees will be split based on an agreed amount if there are two agents, otherwise will be retained entirely by the sole agent

• Collateral monitoring/auditing fees (mostly just for ABL facilities) typically retained solely by the agent monitoring and managing the borrowing base

29



Fees (continued)

• Float/collection day fees (if any) typically retained solely by the agent managing the revolver

• Unused line fees typically not subject to any skim

• Letter of credit fronting fees retained by fronting bank with no skim, but if revolver interest is skimmed, the letter of credit fee paid to the applicable lenders will be skimmed

• Prepayment fees/make whole premiums

may apply only to the term loan and not the revolver

if applies to both sets of obligations, typically paid to first out/ABL lenders at a specific percentage based on commitments/loans with the remainder retained by the last out/term loan lenders

30



Tax Treatment

• Many AALs now often include language stating that, for purposes of tax laws, all payments paid or payable under the credit agreement to specific agents or lenders, but reallocated under the AAL are treated as if such amounts were made to the applicable agents and lenders directly by the borrower

• Unclear if taxing authorities would give these provisions any weight

• Unaware of any lenders having issues with taxing authorities since AALs started being used

31


Voting

Most highly negotiated provisions and an area where the specific circumstances of the borrower and credit facility need to be kept in mind

AAL provisions override those in the credit agreement

Structured so that any determination of “Required Lenders” or “Required Supermajority Lenders” under the credit agreement is deemed to require the vote of the applicable lenders specified under the AAL

Items under the credit agreement that require all lenders or all affected lenders to consent are typically not altered by the AAL

AAL deals mostly with voting issues between the first out/ABL lenders and the last out/term loan lenders and not those within each class

• Intra-class issues dealt with in the definition of “Required First Out Lenders” or “Required Last Out Lenders”, such as requiring not less than 2 unaffiliated lenders within a class to be required lenders for such class or lenders holding at least a specified amount or percentage of the class to always be a required lender for that class

32


Voting

Class Voting - preferred approach for most lenders. Any matter under the credit facility that needs “Required Lender” approval is deemed to require:

• the “Required First Out/ABL Lenders” (lenders holding a majority of the first out/ABL facility, or such other group of first out/ABL lenders) and

• the “Required Last Out/Term Loan Lenders” (lenders holding a majority of the first out/ABL facility, or such other group of first out/ABL lenders)

Can see instead a “drag along” where one group of lenders (such as the group with the most credit risk or the group holding a significant majority of the facility) have voting control under certain circumstances

Typically see drag along rights in ABL deals, in favor of the last out/term loan lenders.

33


Voting

Drag Along - Enables the Required Last Out/Term Loan Lenders to constitute Required Lenders for purpose of the credit agreement so long as:

• Certain last out/term loan lenders hold a specified amount or percentage of the last out/term loan facility (typically the initial last out/term loan lender and its affiliates holding a majority of the last out/term loan facility) and/or

• Certain credit metrics are met (typically certain levels of financial performance, like a fixed charge coverage ratio or first out leverage ratio being at certain levels and/or liquidity being at a certain level)

• No modifications are being made which would waive or eliminate events of default that breach the specified credit metrics, or the ability to receive financial reporting to confirm those credit metrics are met

34


Voting

Drag along will not apply to:

• Matters that require approval of all lenders or all affected lenders under the credit agreement provisions

• Specified “sacred rights” such as: Administrative provisions or mechanics of the credit facility relating to

the revolver and letters of credit, including defaulting lender provisions Provisions relating to the borrowing base, including determination of

eligibility requirements, advance rates, reserves, conditions for making advances and collateral reporting and monitoring

Provisions relating to bank products, including requirements for cash management and cash dominion

If the first out/ABL lenders are banks, regulatory compliance provisions such as anti-money laundering, anti-terrorism, international trade compliance and other “KYC” provisions

Change of control and other fundamental changes Any other provisions that are policy requirements for the first out/ABL

lenders (e.g. capital adequacy, changes in law, tax indemnity, etc.)

35


Voting

Modifications to the “sacred rights” will require the vote of the Required First Out/ABL Lenders – Important to carefully parse through the credit agreement to confirm all desired “sacred rights” are covered

With a drag along, the last out/term loan lenders can waive events of default (other than those specified as part of the sacred rights or which are conditions to the drag along being in effect), but cannot modify the agreement to require the revolving lenders to continue to make loans while an event of default exists

• Important for revolving lenders to make sure that if reps and warranties have to be true and correct at each borrowing, that modifications to key reps (such as no material adverse change) are part of sacred rights

36


Voting

Where there is an ABL revolver, may see provisions restricting releases of reserves or other discretionary items that the ABL agent can adjust with respect to the revolver or borrowing base where it would increase the available amount of advances beyond a certain percentage

• Key for the ABL lender to tie such increases only to the levels at closing (to preserve ability to decrease the borrowing base and then re-set it to the original level) and to make sure that the borrowing base language in the credit agreement, by its terms, permits discretionary changes where needed

If the AAL does not provide for class voting and instead the credit agreement provisions for Required Lenders will control, a minority lender may be able to bargain for a blocking vote on matters most important to it.

37


Buyouts

Allows last out/term loan lenders to buy, at par, all of the first out/ABL obligations (subject to certain carve-outs) under certain triggering events. Typically mirror the terms that are found in an intercreditor agreement

Typical Triggering Events

• Any first out/ABL lender voting against something that requires its vote or failing to vote for something that requires its vote within a certain number of days

Buyout is then limited to the obligations of the holdout lender

To protect other first out/ABL lenders, they may have the first right to buy-out the holdout lender before the last out/term loan lenders can

Any last out/term loan lender holding first out/ABL obligations typically not permitted to vote as a first out/ABL lender

38


Buyouts

Typical Triggering Events (continued)

• The same events that can trigger the ability of the last out/term loan lenders to issue a remedies notice

• The same events that can trigger the waterfall or the ability of the first out/ABL lenders to issue a remedies notice

First out/ABL lenders should require that they have actually triggered the waterfall or sent the remedies notice - until then they are not putting the last out lenders at a disadvantage and despite adverse circumstances, the first out lenders may not want to exit the facility

• Other adverse actions by first out/ABL lenders, such as refusing to make further revolver advances during an event of default

39


Buyouts

First Out/ABL Obligations Required to be Purchased

• Typically will include only the obligations which, if the waterfall were in effect, would be paid prior to the last out/term loan obligations

• Does not include the actual letter of credit or bank product obligations, but does require providing cash collateral for such amounts

LC issuers should be mindful of auto-renewal provisions in LCs and sending notices of non-renewal if desirable

Bank product providers should ensure that they have the right to terminate or not renew bank products and services if there is any event of default under the credit facility, or otherwise at their election

AAL may require that the LC issuer and/or bank product provider take such actions

40


Buyouts

First Out/ABL Obligations Required to be Purchased (continued)

• Should provide that letter of credit obligations and bank product obligations can be paid as they come due out of the cash collateral with any remaining cash collateral returned only after the letters of credit and bank products are terminated

• Should provide that the provisions of the credit documents that secure, or otherwise relate to, the letters of credit and bank product obligations remain in place and cannot be modified without the consent of all affected former first out/ABL lenders

• Typically includes accrued expenses, does not always expressly include indemnities, but indemnified losses may constitute “expenses” if there is an asserted claim

Sometimes see provisions that require cash collateral for indemnity claims that have been asserted as of the buy-out date

41


Buyouts

First Out/ABL Obligations Required to be Purchased (continued)

• Typically provides that any prepayment fee/make whole premium due to first out/ABL lenders at the time of the buy-out is not required to be paid unless it is actually collected within a certain number of days after the buy-out and all other obligations (to the extent they would have been paid in the waterfall prior to such fees) are paid in full

Other Provisions

• If the agent (or one of the agents) is a first out/ABL lender, will permit that agent to resign at its option, and require that it resign at the election of the last out/term loan lenders

If the last out/term loan lenders do not have the capability to manage administrative functions of a typical agent, or the revolver will remain available to the borrower and such lenders do not have the capability to manage a revolver, should consider requiring a minimum transition period to engage a suitable replacement agent or requiring the existing agent to remain in place so long as it is paid a specified fee and reimbursement of its expenses 42


Buyouts

Other Provisions (continued)

• Issuance of a notice of buy-out will put a freeze on any remedies (or the running of any notice period) or waterfall trigger so long as the buy-out is consummated within a specified amount of time and the freeze or rescission of remedies is possible and would not disadvantage the lenders

• May include a “reverse” buy-out right in favor of the first out/ABL lenders with respect to the last out/term loan obligations – more common with cash flow facilities than ABL facilities

43


Assignments

Any assignment of commitments/loans is subject to the assignee becoming party to the AAL in the same position as the assignor

• In the case of assignments by first out/ABL lenders to last out/term loan lenders, or vice versa, AAL will not permit a last out/term loan lender acquiring first out/ABL commitments/loans to vote them (and vice versa)

Restriction on voting may fall away if the last out/term loan lenders hold more than a specified percentage (usually at least 70%) of the first out/ABL facility (and vice versa)

• If the credit facility contains accordion or other provisions for adding new tranches of debt, should require that in the credit agreement any new lender providing such debt is required to become party to the AAL

44


Assignments

Right of First Offer/Right of First Refusal

• Typically the last out/term loan lenders have a right of first offer or right of first refusal with respect to any elective assignment by a first out/ABL lender of its commitment/loans

If structured as a right of first refusal, may include specific provisions on how many times the assigning lender has to go back to the last out/term loan lenders or that an offer from the third party lender that exceeds the existing last out/term loan lenders offer by a certain percentage does not require the assigning lender to go back to the existing last out/term loan lender

• Sometimes also see the converse in favor of the first out/ABL lenders, or that the first out/ABL lenders have the a right of first offer/right of first refusal as to any elective assignment by any other first out/ABL lender before that right can then be exercised by the last out/term loan lenders

45


Assignments

Right of First Offer/Right of First Refusal

• Should be clear that it does not apply to

Initial syndication, if applicable

Assignments to affiliates, related or controlled funds or other lenders in the same tranche

Assignments of all or a substantial portion of a lender’s loan portfolio or to a successor in interest

46


Remedies

Commencing Remedies

• Credit Agreement will typically provide that remedies are instituted upon the request of the “Required Lenders” or at the option of the agent

• AAL will provide that the agent agrees not to elect, on its own, to exercise remedies and instead will act as directed under the AAL

• Similar to voting, the AAL will provide that “Required Lenders” under the credit agreement cannot direct the agent to commence the exercise of remedies and instead, such remedies will be commenced:

If the AAL defines “Required Lenders” as a majority of the first out/ABL lenders and a majority of the last out/term loan lenders, then at the election of the “Required Lenders” as defined in the AAL

At the election of the “Required First Out/ABL Lenders”

At the election of the “Required Last Out/Term Loan Lenders”

47


Remedies

Commencing Remedies (continued)

• However, the ability of the Required First Out/ABL Lenders to direct the agent to commence remedies will typically be the same types of events as would permit the effectiveness of the waterfall, but may also be limited to only the more serious events of default, or may involve lower levels of excess availability or greater levels of financial covenant breaches

• The ability of the Required Last Out/Term Loan Lenders to direct the agent to commence remedies may be any event of default, or only the more serious events of default

• The last out/term loan lenders are typically making a loan based on the “enterprise value” of the borrower, not necessarily the value of any hard assets. As such, their typical exit scenario involves selling the company as a going concern, rather than selling specific assets and so would not favor a straight liquidation of assets in the same way that a first out/ABL lender would and would need more time to tee-up a going concern sale

48


Remedies

Remedies Standstill

• Typically there is no delay in the effectiveness of a remedies notice if the “Required Lenders” have elected to commence remedies

• Typically there is a delay (or standstill) in the effectiveness of a remedies notice from either of the other groups of lenders

• For the first out/ABL lenders this will be a shorter period – usually between 30 and 45 days - but this period can be shortened if the borrower has very little liquidity or there are exigent circumstances.

In negotiating the time period, keep in mind whether any of the borrowing base assets are of a type that would need a quicker than normal liquidation

• For the last out/term loan lenders this will be a longer period – usually between 60 and 90 days – but there can also be the same shorter periods if the borrower has very little liquidity or there are exigent circumstances

• First out/ABL lenders want the first opportunity to act, but triggering remedies also triggers the buy-out right.

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Remedies

Remedies Standstill (continued)

• The standstill periods are split up and reversed in split collateral deals (applicable set of lenders has first opportunity to act with respect to its priority collateral)

• When the AAL contemplates a “split collateral” arrangement, the access period that you would normally see in an intercreditor agreement for a separate credit facilities is not needed as there is only one agent exercising remedies against collateral under the AAL.

• The ABL lenders instead need to require that the applicable term loan assets (such as equipment and IP) are not permitted to be sold (or if sold, contain provisions for a continued access period) until the ABL collateral that requires the use of such assets has been finished off or sold, or the required ABL lenders have otherwise consented to such sale

This is a nuance to the typical provisions in a split collateral AAL that give the required ABL lenders the right to consent to and direct the actions taken with respect to their priority collateral and the required term loan lenders the same rights with respect to their priority collateral

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Remedies

Remedies Not Subject to the Normal Rules

• Cash Dominion – In deals with springing dominion, the AAL should provide that either dominion must be triggered based on the tests in the credit agreement, or if there is an elective element in the credit agreement (i.e. triggered if there is an event of default and the agent or required lenders elect to commence cash dominion), that the required first out/ABL lenders or the agent that manages the revolver have the ability to exercise this remedy immediately and without being subject to a standstill or any other triggers

• Default Interest – AALs will typically provide that, at any time otherwise permitted under the credit agreement, the required first out/ABL lenders may elect to impose the default rate on the first out/ABL obligations and the last out/term loan lenders may elect to impose the default rate on the last out/term loan obligations

Managing this where the term loan is not tranched in the credit agreement can be challenging and the credit agreement – particularly where interest or other payments due on the last out obligations are charged to a revolver that is bearing interest at the default rate

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Remedies

Engaging consultants and obtaining valuations may be remedies under the credit agreement, but are typically permitted at any time by either set of lenders, so long as they are not interfering with the actual remedies being taken by the agent at the direction of the applicable set of lenders

The revolving lenders should always have the right to cease making advances if the conditions to lending are not met

• Gets tricky when there is a drag-along right that permits the last out/term loan lenders to waive events of default so revolving lenders should consider permitting the drag along to provide only a forbearance or limited waiver of certain serious events of default while maintaining the revolving lender’s discretion to cease making advances

The provisions regarding the exercise of remedies come into play when the two lender groups are unable to agree on a course of action. Lenders entering into a unitranche with persons with whom they do not have an established working relationship should be particularly concerned with making the remedies provisions as clear as possible

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Bankruptcy

AALs vary widely in terms of whether or not, and to what extent, they address matters specifically relating to bankruptcy

• Some AALs do not address bankruptcy at all – essentially taking the position that since a unitranche is intended as one syndicated credit facility with one “class” (in the bankruptcy sense) of obligations, and since such standard syndicated credit facilities do not typically contain detailed interlender agreements on how bankruptcy will be handled, there is no need to act differently in this case

• Other AALs include the full set of bankruptcy related provision that are typically provided for in intercreditor agreements for first lien/second lien or split collateral deals

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Actions in a Bankruptcy

Credit Bidding

Authorizing/Objecting to 363 Sale

Voting on a Plan

DIP Loans/Use of Cash Collateral

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Unique Enforcement and Bankruptcy AAL Issues

a. General Observations

b. Collective Action Restrictions

c. Lifting of the Automatic Stay

d. AAL Enforceability Case Law

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a. Post-Petition Interest

i. Bankruptcy Code

ii. 1st Lien / 2nd Lien

iii. AAL

b. Adequate Protection

i. Bankruptcy Code

ii. 1st Lien / 2nd Lien

iii. AAL

Post-Petition Interest and Adequate Protection

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Debtor-In-Possession Financing

a. Scope of AAL waterfall

b. Consent to Priming

c. Roll-up

d. Control

i. Information

ii. Asset Sale Milestones

iii. Plan of Reorganization Requirements

e. Plan Treatment

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Section 363 Sales and Credit Bidding

a. Drag-along

b. Pre-conditions

c. Credit bidding

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Plan Classification and Voting

a. Bankruptcy code

i. classification

ii. voting

b. AAL provisions and case law

i. classification

ii. voting

c. Classification (same class v. separate classes)

d. Voting restrictions

i. structuring

ii. drafting

e. Cram-down plan

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Reorganization Securities

a. General treatment

b. Insolvency proceeding

c. Non-collateral proceeds

d. Cram-down plan

e. Debt securities

f. Equity securities

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6. What are the pitfalls and opportunities for First Out Lenders and Last Out Lenders in a

cram-down plan and the potential impact on state law causes of action to enforce the AAL?

a. State law claims

i. Turnover

ii. Lien priority

iii. Standing

b. Enforceability in cram-down plan

c. Third-party releases

Non-Consensual Plan Confirmation

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Thank You

Kenneth E. Noble

Partner,

Holland & Knight LLP

31 West 52nd Street, 12th Floor

New York, New York 10019

(212) 513-3574

[email protected]

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