Intercreditor Agreements in Leveraged Transactions

Course Overview:

Intercreditor agreements have assumed increasing importance over the past few years. The evolution of laminated structures prior to the credit crisis, initially comprising senior and mezzanine and later, now nascent, 2nd Lien loans, forced these arrangements into sharp relief. Inevitably the increase in financial distress flushed out the numerous issues in the prevailing arrangements in a raft of landmark cases (e.g. European Directories, Stabilus, Trimast and IMO Carwash).

The market responded with the introduction of the LMA Intercreditor precedent in 2009 seeking to codify the market approach which, largely, had remained uniform prior to the crisis. Stung by a series of reverses in IMO and other cases, RBS Worldpay represented the first real effort by mezzanine lenders to redress the balance of power and may well have led to the publication of a revised LMA Intercreditor in 2012. This sought to address some of these issues, particularly valuation and the duties of the Agent vis-a-vis the mezzanine.

The LMA was always designed as a point of departure and its role has, to some extent, been undermined by the wave of bifurcated pari Loan / Bond structures which have gained traction over the last few years. These structures embrace a raft of variations; super senior RCF / senior secured bonds either on their own or together with junior secured 2nd Lien Notes (e.g Voyage) and/or junior unsecured notes (e.g Perstorp). Additionally, since late 2012, the market has also witnessed the resurrection of PIK Notes which have introduced additional complexity. These structures, and particularly the rise of senior secured notes (which historically were generally junior unsecured instruments in Europe), have created intercreditor tensions which were never envisaged by the LMA precedents.

Despite this, the issues inherent in intercreditor arrangements are, to a large extent, similar in all cases. This programme seeks to focus on the main issues in both traditional senior Loan/ Mezz structures and also reviews the problems facing the market in the pari Loan / Bond structures in both corporate deals (e.g. Virgin) and sponsored transactions.

Course Content:

Introduction to Ranking and Subordination techniques

• Why and when it matters
• Methods of creating Subordination
  • Taking collateral / security
  • Contractual
  • Structural
  • Assignment of junior debt
• Role of Collateral / Security
  • Structural subordination
  • Contractual subordination – different types
  • Intercreditor Agreement
  • Deeds of Priority
  • Subordination Agreement
  • Equitable subordination (Certain EU Jurisdictions – Germany, Spain, France, Italy)

Review of relevant deal structures

• “Traditional” senior loan vs mezzanine, shareholder loans
• Legacy deals – senior, 2nd lien loans, mezzanine, shareholder loans
• Senior loan vs junior note
• Pari-Senior Loan/Bond structures (“Loan and Note)
  • Super senior RCF vs Senior Secured Notes
  • Super Senior RCF, Senior Loans and Senior Secured Notes
• Junior Note structures
• Senior Loans vs Junior Notes e.g. 2nd lien notes (Voyage) & PIK notes (Com Hem, Orange PIK Toggle)
• Complex structures
  • Super Senior RCF, Senior Secured Notes, Junior Notes and Mezzanine (Perstorp)
  • Super Senior RCF, Senior Secured Notes, Junior Notes and ABL (Algeco Scotsman)

Relevant documentation

• Review of typical ICA document structure – typical sections & clauses in LMA ICA
• Impact of the Worldpay deal on the Intercreditor landscape
• Summary of changes to 2012 ICA (vs 2009 version)
• Typical application of the LMA
• The LMA ICA as a point of departure for negotiations
• Circumstances where the LMA is not applicable
• Intercreditor in pari Loans/ Bonds

Ranking & the Waterfall / Cascade: general approach

• Who should be a party to the ICA
• Ranking of the various “layers” of debt
  • Typical ranking
  • Position of hedge liabilities
  • Dealing with intra-Group & parent liabilities
  • Issues arising in re Loan notes, Equity substitutes, Vendor loans
  • Rationale for inclusion as parties to the Intercreditor
  • Rationale for exclusion as parties in the Intercreditor
• Position in Pari loan / Bond structures
• Interaction with ABL Facilities
• Ranking as to Payment
  • Permitted Payments on Hedge Liabilities
  • Permitted payments & restrictions on Mezzanine
  • Mezzanine Payment “Stop Notice”
  • Potential abuse and cure
  • Mezzanine Debt purchase by sponsor
• Ranking as to Proceeds of Enforcement of Transaction Security
• Senior Facility Liabilities – Restrictions and Permissions
• Security and guarantees/indemnities – Senior Lenders

Issues with Hedging & Hedge parties

• Summary – key ISDA documents
  • 1992 ISDA Master Agreements & Schedule
  • 2002 ISDA Master Agreement & Schedule
• Definitions relevant to hedging
  • “Close-out Netting”
  • “Senior Credit Participation”
  • Voting rights – inclusion in “Majority Senior Lenders”

Interaction of cross-default vs cross-acceleration between senior & junior

• Implications for EoD under the SFA on the Mezzanine
• Trigger options for Mezz EoD
  • SFA EoD, Default or Acceleration
• Limit to specific Events / covenants
  • Typical carve-outs
• Position in pari Loan / Bond structures
  • Potential solutions

Option to Purchase

• Position under the 2009 LMA
• Position under the 2012 LMA
• How effective is this remedy: Examples in practice
  • Lessons from IMO Car Wash
• Approach in pari-Loan/Bond structures
  • Is it workable solution
• Current market trends / wishlist for Mezzanine

Enforcement of Security

• Meaning of “Enforcement Action”
  • What is “Enforcement” q.v. Trimast case
• Who can Enforce – importance of the “Instructing Group”
  • Instructing Group in Senior loan v Mezz structures
  • Instructing Group in pari Loan / Bond Structures
  • Role of the “Security Agent”
• Timing of Enforcement standstills
  • Enforcement standstills
  • Senior loans vs mezz
  • pari Loan / Bond structures
  • When can Mezz and other junior lenders Enforce?
• Problem areas re Enforcement
  • Timing, manner of Enforcement
  • Role of the Security Agent in Enforcement
  • Lessons from Saltri v MD Mezzanine case

Non-Distressed disposals

• Application and scope – ‘Non-Distressed” defined
• Interaction with the Senior Facilities Agreement
• Interaction with the Mezzanine Agreement
• Release of Security
• Waterfall of “Disposal Proceeds”
• Position in pari Loan / Bond structures
  • Covenants in High Yield Bonds affecting Disposals
  • Reconciling conflicts in pari Loan / Bond structures

Distressed Disposals

• Release of Guarantees and Security
  • What can be released
  • Changes under the 2012 LMA ICA
  • Circumstances in which the junior lender’s claims can be “discharged”
  • Lessons from the European Directories case
• Valuation issues
  • Position under 2009 LMA ICA
  • Position under 2012 LMA ICA
  • Lessons from IMO Carwash case
  • Valuation approach – going concern vs liquidation
  • Valuation method – problems with “traditional approaches” in distress
  • “Fair value” defined
  • Approaches per the 2012 LMA ICA
  • Potential problems with “Fair Value” (why “fair” may not be “fair”)
  • What is a “Competitive Sales Process”
  • Solutions for Junior lenders re “Fair Value”
• Form of consideration; cash vs non cash consideration (2012 ICA)
  • Potential pitfalls – D4E and pre-packs

Consents, amendments, waivers & overrides

• Amendments to the Senior loans
  • Amendements requiring mezz / junior lender approval
• Amendments to the mezzanine / junior debt
  • Amendments requiring senior approval
• Amendments and waivers re Transaction Security
• Position in pari Loan / Bond structures
  • Various solutions

Voting issues

• Disenfranchisement of Sponsors
• Disenfranchisement of (Defaulting lenders)
• Disenfranchisement of Sponsors
• Snooze & Lose
• Issues not currently addressed in the ICA
• Matters in pari Loans / Bonds
  • One man one vote? (e.g. Schmolz)

Other matters

• Turnover per and post enforcement
• Information rights & Board for mezz/ junior lenders
  • Going on the Board – pros & cons
  • Observer status – pros & cons
  • Other solutions / approaches to getting information

Issue arising from a Refinancing of the Senior Facilities

• Refinancing scenarios
  • Refinancing vs Recapitalisation
  • Senior Lenders’ rights to increase senior debt
  • Interaction with “Senior Headroom”
• Review of relevant terms & definitions
  • Senior Principal Increase
  • Qualifying Senior Refinancing
  • Senior Yield Headroom
• Impact on Financial Covenants
• Issues with Senior Fees (q.v. “Refinancing Yield Increase”)
• Problems when refinancing the SFA with Notes

Intercreditor issues arising from US parties / security

• Terms to include in LMA / European Intercreditor
  • Bankruptcy waiver
  • Automatic Acceleration
  • Separate security
• EU terms to include in NY style Intercreditor
  • Release / Assignment of claims on sale or enforcement
  • Payment subordination

Hot topics

• Issues the LMA ICA does not address
• Information rights for junior lenders
• Mezz expenses for Adviser costs in distress
• Caps & use
• Option to Purchase
• Refinancing of the Senior liabilities (new approach in the 2012 LMA ICA)
• Issues arising from pari Loan / Bonds
• Voting – one man one vote

What our clients are saying about the course

“A very energetic trainer who provided references to key deals & cases”

“The course was divided up well & had continuous themes that made it interesting throughout”

“Very well delivered; I never felt sleepy at all unlike other courses I have attended. A good use of live deals”