Intercreditor Issues in Leveraged, Unitranche, Real Estate and ABL Transactions

• Understand the various tools used to achieve ranking/subordination
• Review the (Loan Market Association) intercreditor precedents which embrace leveraged, high yield, Unitranche and real estate transactions
• Identify the key issues in intercreditor agreements which come to the fore in distress situations
• Review the relevant cases relating to f. IMO Carwash, Stabilus and European Directories
• Gain an understanding of intercreditor risk and mitigation techniques in emerging and developing markets
• Gain an overview of Agreements Amongst Lenders (“AAL”)– use in Europe (Unitranche), key issues and interaction with the Intercreditor
• Discuss solutions to accommodate Asset Based Lending with other debt (Bonds, Unitranche, Loans)

Key challenges in cross border restructurings

• Inconsistency in restructuring/insolvency laws across jurisdictions
• Importance of moratorium on unilateral creditor action
• Valuation inconsistencies
• Why a cramdown matters
• Deficiencies in collateral for secured creditors 

Benefits of Intercreditor agreements in cross-border restructurings

• Cash preservation for senior creditors
• Restrictions on cash leakages to (more) junior and unsecured creditors
• Payment stop notices
• Senior lenders retain control of the capital structure
• Anti-layering - Restrictions on issuance of more senior or pari passu debt absent senior lenders’ consent
• Restrictions on providing collateral to more junior creditors
• Restrictions on junior lenders ability to amend the Senior Credit Agreement
• Restrictions on Enforcement by junior creditors
• Relevance of the intercreditor release mechanism (in distress) 

Ranking and Subordination techniques

• Summary of key terms of relevant junior debt instruments
• Mezzanine
• Second Lien Loans & Notes
• Subordinated/Unsecured Notes
• Pay in-Kind (“PIK”) Loans & Notes
• Unitranche (First Loss)
• Methods of creating ranking/subordination
• Taking collateral/security
• Contractual
• Structural
• Temporal
• Lien subordination 

Relevant LMA precedents and market documentation

• The 2012 Leveraged precedent
• SSRCF 2013 version for Pari Loan Bond structures
• The Real Estate intercreditor precedents – Structural & Contractual
• Leveraged Acquisition Finance (Super Senior/Senior) for Unitranche (2018) 

Review of relevant deal structures

• Senior, mezzanine, shareholder loans
• Senior, 2nd lien loans, shareholder loans
• Intercreditor agreements in Real Estate transactions
• Asset Based Lending structures
• Unitranche / direct lending structures
• Classic and FOLO 

Recognition (or not) of Intercreditor Agreements

• Key issues in determining if intercreditor agreements are recognised in a jurisdiction
• Where are the assets subjected to the intercreditor agreement located?
• Will/could local bankruptcy laws override intercreditor agreements
• Local judgements legal pronouncements
• Potential solutions if the intercreditor agreement may not be recognised
• Structurally subordinate junior lenders
• Assignment of junior lenders’ collateral
• Using POAs in favour of senior lenders
• Turnover clause 

Ranking & the Payment Waterfall: general approach (leverage Intercreditor)

• Who should be a party to the ICA
• Problems with Shareholder Loans
• Ranking of the various “layers” of debt
• Typical ranking
• Position of hedge liabilities
• Dealing with intra-Group & parent liabilities
• Issues arising regarding Loan notes, Equity substitutes, Vendor loans

• The rationale for inclusion as parties to the Intercreditor
• The rationale for exclusion as parties in the Intercreditor

• 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 the sponsor
• Ranking as to Proceeds of Enforcement of Transaction Security
• Senior Facility Liabilities - Restrictions and Permissions
• Security and guarantees/indemnities - Senior Lenders
• Key differences with the Unitranche Intercreditor 

Issues with Hedging & Hedge parties

• Definitions relevant to Hedging
• “Close-out Netting”
• “Senior Credit Participation”
• Voting pre-close out – key issues
• Post close out - inclusion in “Majority Senior Lenders” 

Specific challenges for junior debt in emerging markets

• Key risk in emerging markets
• Types of Legal risks
• Documentation
• Enforcement
• Political risk
• Techniques for mitigating legal risk 

Non-Distressed disposals

• Application and scope – “Non-Distressed” defined
• Interaction with the Senior Credit Agreement
• Interaction with the Mezzanine Agreement
• Release of Security
• Waterfall of “Disposal Proceeds” 

Enforcement of Security

• Who can Enforce – the importance of the “Instructing Group”
• Instructing Group in Senior loan v Mezzanine structures
• Instructing Group in Unitranche deals
• Role of the “Security Agent”
• Timing of Enforcement standstills
• Enforcement standstills

• Senior loans vs. mezzanine
• 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 (Stabilus) case 

Option to Purchase & Turnover clause

• Key terms
• How effective is this remedy: Examples in practice?
• Lessons from IMO Car Wash
• Does Stabilus change things
• Approach in Pari-Loan/Bond structures
• Is it a workable solution?
• Current market trends / Wishlist for Mezzanine
• Turnover per and post enforcement

Distressed Disposals

• Release of Guarantees and Security
• What can be released?
• Circumstances in which the junior lender’s claims can be “discharged”
• Lessons from the European Directories case
• Valuation issues – Price vs Value
• Lessons from IMO Carwash case – what went wrong (and how to fix it)
• A closer look at Stabilus – is this more instructive?
• 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
• Credit bidding
• Is it available under the Intercreditor?
• The Stabilus position
• Credit bidding in action
• Potential pitfalls 

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 

Inter-creditor issue re additional debt

• Should the new debt be subject to an intercreditor?
• Issues with Secured Debt
• Accordions vs Incremental Equivalent Debt
• Issues with Unsecured debt
• Documentary options – upfront ICA or deferred? 

Key differences between the Leveraged and Real Estate Intercreditor

• Differences in deal structure and ramifications
• Approach to security
• Issues with the Security Agent
• Dealing with Hedging
• Acquisition of shares in the mezzanine borrower
• Cure rights – a different approach
• Release of security and disposals 

Intercreditor issues in Asset Based Lending structures

• Key concerns of ABL lenders
• Key concerns of the other finance parties (high yield, Unitranche, Loans)
• Interaction with ABL Facilities
• Intercreditor issues in ABL
• Standstills
• Enforcement
• Dealing with “pools” of collateral
• Possible solutions in the European context 

Intercreditor issues in Unitranche structures

• Key protections for the Super Senior Lenders
• Veto rights in the Credit Agreement – typical clauses
• Material events of Default in the Credit Agreement – typical terms
• First Loss (Unitranche) as the initial Instructing Group
• Step in rights for the Super Senior Lenders
• Protective rights for Unitranche when the Super Senior Lenders are the Instructing Group
• Options for the parties in distress scenario 

Issues in Agreement Amongst Lenders

• Use and application (lessons from America?)
• Intercreditor vs AAL
• Issues in the AAL
• Problems for borrowers

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring many high-profile project financings including, BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive, he was involved in a wide range of public and private transactions. Subsequently, he joined Hoare Govett as an assistant director, where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991, he joined ABN Amro’s cross-border M&A team before being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A, where he was also involved in several deals in Central Europe. During this time, he was a member of the EU-PHARE programme and advised the Estonian government on its privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons.) at UNISA.

Intercreditor Agreements are an essential ingredient in deals that feature multiple layers of debt and become part of restructuring situations when there is a conflict between different financial providers.

Chapter 11 in the U.S., provides the statutory procedure that facilitates an orderly restructuring that acknowledges the priority of senior and junior debt; however, these techniques are not available elsewhere.  Against this background, Intercreditor agreements have emerged as a vital tool to provide some, but not all, of the advantages offered by Chapter 11.

The course reviews the key aspects of typical Intercreditor agreements, especially the various LMA precedents for leverage loans, pari-loan/bond deals, real estate and Unitranche transactions. It analyses which provisions are key in distress and reviews how these matters play out in practice regarding the relevant legal cases, e.g. Stabilus, IMO Carwash and European Directories.

Debt markets have expanded their product range, for example, the provision of Unitranche by direct/alternative lenders and the LMA has responded with the publication of an Intercreditor that covers the classic Unitranche structure but not the bi-furcated structures that are increasingly common. The course reviews the key issues in those transactions.  At the same time, emerging markets are seeing greater use of junior debt and the course looks at how risks in those markets can be mitigated since many of those jurisdictions, and many developed legal systems too, do not acknowledge Intercreditor agreements.