Structuring & Negotiating Mezzanine, Unitranche and Junior Debt

Course Overview:

The junior credit spectrum has experienced a renaissance in the last few years. Whilst mezzanine retains a key role in deals which are too small to access the bond markets (e.g. Well Intervention’s NOK 623m) it has struggled to gain traction in the larger deals which are in reach of the capital markets.

Unsurprisingly there has been a dramatic rise in the issuance of notes across the junior credit spectrum; from second lien (e.g. Tank & Rast), through junior unsecured with PIK Toggles in particular witnessing huge liquidity (e.g. Xella, AA, Rhiag). At the same time Unitranche has gained increasing acceptance and is seen as a preferred alternative to the traditional senior/mezzanine combination. The advent of club-deals (e.g. Trainline’s £190m club) means that Unitranche can accommodate increasingly larger deals (e.g. Flexitallic €275m) and is now a viable alternative to junior notes in larger deals.

Despite these challenges, the absence of senior debt means that junior debt is set fair for the foreseeable future whilst the flexibility offered by mezzanine will ensure that it continues to have a vital role to play in the funding structure. These advantages need to be measured against the additional complexity and risk inherent in these laminated structures. The subordinated nature of junior debt means that investors need to be alive to the key risks and critical issues which arise when the borrower enters distress.

This programme examines the range of junior debt loan products available in the market, the use an application of the various instruments, the typical terms and conditions, market pricing and returns. The key risk areas for junior lenders and the related aspect of structuring issues and debt capacity.

European markets differ from US markets to the extent that restructurings in the former are typically out-of-court (as opposed to the statutory approach of Chapter 11 in the US). This coupled with the different approaches in the various European jurisdictions means that inter-creditor issues assume a critical aspect of structuring and the programme deals with the key issues plus the additional protection required for deals with a US dimension.

The course is highly practical and interactive and will include case studies to illustrate and reinforce the topics covered.

Participants will be required to bring a laptop to the course.

Course Overview:

The junior credit spectrum has experienced a renaissance in the last few years. Whilst mezzanine retains a key role in deals which are too small to access the bond markets (e.g. Well Intervention’s NOK 623m) it has struggled to gain traction in the larger deals which are in reach of the capital markets.

Unsurprisingly there has been a dramatic rise in the issuance of notes across the junior credit spectrum; from second lien (e.g. Tank & Rast), through junior unsecured with PIK Toggles in particular witnessing huge liquidity (e.g. Xella, AA, Rhiag). At the same time Unitranche has gained increasing acceptance and is seen as a preferred alternative to the traditional senior/mezzanine combination. The advent of club-deals (e.g. Trainline’s £190m club) means that Unitranche can accommodate increasingly larger deals (e.g. Flexitallic €275m) and is now a viable alternative to junior notes in larger deals.

Despite these challenges, the absence of senior debt means that junior debt is set fair for the foreseeable future whilst the flexibility offered by mezzanine will ensure that it continues to have a vital role to play in the funding structure. These advantages need to be measured against the additional complexity and risk inherent in these laminated structures. The subordinated nature of junior debt means that investors need to be alive to the key risks and critical issues which arise when the borrower enters distress.

This programme examines the range of junior debt loan products available in the market, the use an application of the various instruments, the typical terms and conditions, market pricing and returns. The key risk areas for junior lenders and the related aspect of structuring issues and debt capacity.

European markets differ from US markets to the extent that restructurings in the former are typically out-of-court (as opposed to the statutory approach of Chapter 11 in the US). This coupled with the different approaches in the various European jurisdictions means that inter-creditor issues assume a critical aspect of structuring and the programme deals with the key issues plus the additional protection required for deals with a US dimension.

The course is highly practical and interactive and will include case studies to illustrate and reinforce the topics covered.

Participants will be required to bring a laptop to the course.

Course Content:

Introduction to Junior debt – application, target returns, pros & cons

• Junior Loans
  • Mezzanine
  • Unitranche
• Junior Notes
  • Second Lien
  • PIK
  • Subordinated High Yield Notes

Rationale for Junior Debt

• Borrower’s perspective
  • Value drivers – equity
  • Key reasons to use junior debt
• Lender’s / Investor perspective
  • The case for junior debt
  • Summary of key issues for junior debt
    • Ranking
    • Collateral
    • Tax issues

Subordination & other structuring issues

• The key issue for junior lenders – what happens if things go wrong?
• Subordination: how and why it matters
  • Contractual subordination
  • Structural subordination
  • Equitable subordination (Certain EU Jurisdictions – Germany, Spain, France, Italy)
• Issues relating to Security/Collateral
  • Approach in Europe / Asia Pacific
  • Approach in USA & how it can affect EU deals
• Tax issues
• Debt capacity
  • The basics – three approaches
  • Fine-tuning the deal

Structuring parameters – how much debt

• Typical approaches to gauging debt capacity / capital structure
• What are the key criteria to consider
  • Multiples vs Capital approach
  • Key ratios (covenants where relevant) used to right-size the debt
• How Jurisdiction can affect debt capacity (and how to mitigate)

Case: Developing a funding requirement and funding structure for an LBO using senior and junior debt. Analysing the debt capacity of the target and whether the funding structure is viable

Types of Mezzanine: use and key issues

• Main features of the mezzanine coupon
• Warranted mezzanine – structure
  • Key issues for warranted mezzanine
• Warrantless mezzanine – structure
  • Key issues & pitfalls for warrantless mezz
• Hybrid mezzanine (not seen recently)
• Other variants of mezzanine
  • Senior mezz
  • Junior mezz

Case: Estimating the amount of equity (warrants) the mezzanine lender requires to achieve its target return; commenting on the actual return achieved by the mezzanine lender in light of current market

Unitranche

• Key features & rationale
• Use & application
• “Typical” terms, pricing and structuring
• Recent developments & implications
  • Club deals
• Pros & cons for borrowers
• Pros and cons for PE firms (impact on returns)
• Issues for lenders
• Documentation
• Key (inter-creditor) issues for borrowers and lenders

Case: Developing an alternative funding structure using Unitranche; commenting on the pros and cons of Unitranche as it affects borrowers in terms of leverage and headroom, and the PE return

PIK & PIK Toggles

• The renaissance of PIK
• Pay-in-Kind (PIK) generally
• Different types PIK vs PIYW/Toggle vs PIYC
• PIK Toggles – the key issues
  • Applicable amounts vs Minimum cash balances
• Topical matters and market trends
  • Distribution stripping
  • Midco carveouts

Second Lien

• Review of recent deals (Tank & Rast)
• Is the market open
• Typical terms and pricing

Documenting junior debt

• Overview of the Mezzanine/Second Lien/ Unitranche loan agreement
• Typical inter-creditor issues for junior debt
  • Payment standstills / Stop Notice
  • Enforcement standstills
  • Turnover
  • Option to purchase – Practical issues
• Hot “issues”
  • Access to Information
  • Fees in distress
  • Valuation in distress (q.v. IMO Carwash)
  • Release of collateral (q.v. European Directories)

What Redcliffe’s clients are saying about the course

“A fantastic trainer with an incredibly deep knowledge the subject. 5* course!”

“A good mixture of the financial & legal issues relating to junior debt”

“An engaging course which included case studies, market stats & real world examples”