Restructuring Unitranche Loan Facilities: Navigating the ...media.straffordpub.com/products/restructuring-unit... · 30.03.2017 · –Jurisdiction and Enforceability: Will bankruptcy

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

Restructuring Unitranche Loan Facilities:

Navigating the Unique Aspects of

Agreements Among Lenders Rights and Remedies of First-Out and Last-Out Lenders Inside and Outside of Bankruptcy

Today’s faculty features:

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

THURSDAY, MARCH 30, 2017

Gregory M. Bilton, Partner, Riemer & Braunstein, Boston

Brad B. Erens, Partner, Jones Day, Chicago

Rachel L. Rawson, Partner, Jones Day, Cleveland

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Restructuring Unitranche Loan Facilities: Navigating the Unique Aspects of Agreements Among

Lenders Rights and Remedies of First-Out and Last-Out Lenders Inside and Outside

of Bankruptcy

Gregory M. Bilton [email protected]

Brad B. Erens [email protected]

Rachel L. Rawson [email protected]

• General Considerations

– Voting Arrangements

– Buy-Out Options • Last-Out Loan Holders

• First-Out Loan Holders

• Who has priority if both are given?

– Right of First Offer

– Application of Payments Pre-Waterfall

– Application of Payments Post-Waterfall

– Who is the Administrative Agent? FO or LO holder

UNIQUE INTER-LENDER ISSUES IN UNITRANCHE LOAN FACILITY

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• Bankruptcy Issues

– Voting Arrangements

• May provide evidence of single class in bankruptcy (especially with lender insider affiliates)

– Jurisdiction and Enforceability: Will bankruptcy court have jurisdiction to

enforce Agreement Among Lenders (AAL)

• Typically Borrower is not party to the AAL

– Claim Classification: All lenders grouped as single-class

• Higher Risk of Cramdown

• Higher Risk of FO Lenders found to be undersecured loss of right to collect interest and fees in insolvency proceeding

UNIQUE INTER-LENDER ISSUES IN UNITRANCHE LOAN FACILITY

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• Typical Positions Under Credit Agreement

– Sacred Rights: Unanimous consent and consent of each Lender affected thereby

– Required Lenders

• 50%/2

• Other formulations (i.e. hardwiring club Lenders, hold sizes)

– Unique Considerations

• Cross-Over Voting (Intercreditor examples)

• Affiliated Debt Funds (see LSTA form language)

• Affiliated Equity Funds (see LSTA form language)

POWER TO CONSENT TO RESTRUCTURING A UNITRANCHE LOAN FACILITY

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• AAL Alterations

– Sacred Rights: Unanimous Consent and Consent of each Lender affected thereby unchanged

– Required Lenders

• Includes Required FO Lenders and Required LO Lenders

• 50%/2 for each class

• Specific restriction that if Required FO Lenders constitute Required Lenders under Credit Agreement than agreement not to vote without consent of Required LO Lenders and vice-versa

– Unique Considerations

• Cross-Over Voting:

– disregard (or deemed to consent) for FO Lender voting except for sacred rights and vice versa

– No restrictions if threshold of pro rata shares of applicable class

• Affiliated Debt Funds

• Affiliated Equity Funds

POWER TO CONSENT TO RESTRUCTURING A UNITRANCHE LOAN FACILITY

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What is exercise of remedies? “the diligent pursuit in good faith of the exercise of any secured creditor enforcement rights or remedies that are available upon the occurrence of an Event of Default with respect to any Loan Party, any other obligor party to a Loan Document, or any Collateral” (i) the acceleration of the Obligations (ii) the delivery of a notices to spring control agreements (iii) the solicitation of bids from third parties to conduct liquidation of all or a material portion of the

Collateral (iv) the engagement of third parties for the purposes of valuing, marketing, and promoting a sale of

all or a material portion of the Collateral within a commercially reasonable time, (v) the opposition of the use of cash collateral or sale of assets in an bankruptcy proceeding (vi) any action to foreclose on any Lien on all or any material portion of the Collateral, (vii) notification of account debtors to make payment to the Administrative Agent or its agents, (viii) any action to take possession of all or any material portion of the Collateral (ix) commencement of any legal proceedings or actions against or with respect to all or any material

portion of the Collateral) (x) Any other actions specifically referenced in the Credit Agreement

RIGHT TO EXERCISE REMEDIES PRIOR TO THE COMMENCEMENT OF A BANKRUPTCY PROCEEDING

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Who can exercise remedies absent commencement of bankruptcy proceeding? Credit Agreement:

– Administrative Agent shall, at the request of, or may, with the consent of the Required Lenders:

• Terminate commitments • Accelerate • Exercise any other rights available under loan documents

– Immediate commitment termination and acceleration upon specified Events of Default (bankruptcy)


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AAL Modifications: FO Direction to Exercise of Remedies – Required FO Lenders provide written demand to Administrative

Agent following Event of Default – Following negotiated standstill period (typical FO standstill is 30

days) Administrative Agent shall (and is deemed to be directed in writing by ALL LENDERS) terminate Commitments, accelerate obligations and commence exercise of remedies

– so long as no LO Committed Buy-Out Notice or Offer Notice has

been provided and is not waived, rescinded or lapsed – No restriction on FO to retain bankers or appraisers regarding

valuation so long as Administrative Agent has not done so


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AAL Modifications: LO Direction to Exercise of Remedies – Required LO Lenders provide written demand to Administrative Agent

following Event of Default – Following negotiated standstill period (typical LO standstill is 90 days)

Administrative Agent shall (and is deemed to be directed in writing by ALL LENDERS) terminate Commitments, accelerate obligations and commence exercise of remedies

– so long as Required First Out Lenders has not provided demand for

Exercise of Remedies or Administrative Agent is not diligently pursuing Exercise of Remedies directed by FO Lenders

– No restriction on LO to retain bankers or appraisers regarding

valuation so long as Administrative Agent has not done so


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AAL Modifications:

– Administrative Agent will not commence Exercise of Remedies except upon direction by Required FO Lenders or Required LO Lenders [or Required Lenders]

– Triggered upon Exercise of Remedies • Payment waterfall

• Buy-Out Rights

• Bankruptcy

• Power to direct remedies

• Voting rights


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• Waive or forbear on underlying Events of Default (if able to do so – but Required Lenders typically requires Required LO Lenders)

• Exercise Buy-Out Options

• Commence Bankruptcy Proceeding

• Negotiated Outcome

• Who is Administrative Agent? They have good faith discretion to ensure it is permitted by applicable law or wouldn’t result in liability and can appoint FO Lender Rep or LO Lender Rep

RIGHTS OF FIRST-OUT LENDERS TO STOP THE EXERCISE OF REMEDIES

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• Waive or forbear on underlying Events of Default (if able to do so – but Required Lenders typically requires Required FO Lenders)

• Exercise Buy-Out Options

• Commence Bankruptcy Proceeding

• Negotiated Outcome

• Who is Administrative Agent? They have good faith discretion to ensure it is permitted by applicable law or wouldn’t result in liability and can appoint FO Lender Rep or LO Lender Rep

RIGHTS OF LAST-OUT LENDERS TO STOP THE EXERCISE OF REMEDIES

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• Enforcement of rights as a secured creditor is always the lenders’ last resort.

– Preceded by efforts to restructure the debt, reach another accommodation or work out a resolution

– Most times the borrower itself will implement the process to refinance, sell the business, obtain a new investor, etc.

CONSEQUENCES THAT MAY RESULT FROM AN EXERCISE OF REMEDIES

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• Once a secured creditor commences enforcement, you can’t put the genie back in the bottle.

– Accounts receivable collections slow down and dry up

– Going concern value is impaired or lost

– Costs and expenses are incurred which may not be recovered

– A great amount of time and energy of the lenders’ officers and employees is devoted to the relationship


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• The exercise of remedies must be commercially reasonable in all respects

– The choice of a public or private sale – Section 9-625 of the Uniform Commercial Code imposes liability

on a secured creditor who does not realize the full value of the collateral

– But compare 9-627: “The fact that a greater amount could have

been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner.”


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• Fair warning:

“Whatever you did, you shouldn’t have done. Whatever you did, you did wrong. Whatever you didn’t do, you should have.”


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RIGHTS OF LAST-OUT LENDER FOLLOWING COMMENCEMENT OF BANKRUPTCY PROCEEDING

• A last-out lender is still a creditor

– The AAL customarily provides that the last-out lender can always exercise any rights and remedies that an unsecured creditor would have

– The restrictions are related to the exercise of remedies against

collateral and the receipt of proceeds of collateral – Does this effectively “take away with the left hand what the

right hand has given”? – See, In re MPM Silicones (a/k/a Momentive): “Waivers of a

secured creditor’s rights under such agreements must be clear beyond peradventure”

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• The restrictions on the LO Lender and the waivers made by the LO Lender in the AAL may well not be enforced by the bankruptcy court

– Bank of America v. North LaSalle: “It is generally understood that pre-

bankruptcy agreements do not override contrary provisions of the Bankruptcy Code”.

– Many courts have ruled that waivers of the right to vote a claim by a

subordinate lender and the delegation of that right to a senior lender will not be enforced. Only the holder of the claim may vote it.

– Aeropostale: DIP facility objected to by junior lender despite provision in

intercreditor agreement prohibiting such objection. The issue was whether the DIP facility, being provided by a new lender, had been consented to by the senior lender.

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• The interests of the FO Lenders and the LO Lenders may tend to diverge. Drafting is critical to try and maintain the control sought in the AAL. Eliminate ambiguity:

– Do not merely state that the LO Lenders’ claim is subordinated

to the claim of the FO Lenders and that proceeds of collateral are paid to the LO Lenders lower on the waterfall. Rather, state that no payments from any source may be paid to or received by the LO Lenders until the FO Lenders have been paid in full.

– Do not merely state that the LO Lenders cannot object to a sale

if the FO Lenders support it. Rather, state that the LO Lenders won’t support or object to any sale contrary to the support or objection of the FO Lenders, including bidding procedures for any such proposed sale.

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PITFALLS AND OPPORTUNITIES FOR FIRST-OUT LENDERS AND LAST-OUT LENDERS IN CONNECTION WITH FINANCING A BANKRUPTCY PROCEEDING

• Providing a DIP facility affords the lenders an

opportunity to support its borrower, and facilitate the Debtor’s plan – implement a sale, a reorganization, or other outcome.

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• A DIP lender will be granted rights and influence that a prepetition lender would not have:

– Input in the formulation of the Budget – Input on any applicable milestones in the case, such as

in a 363 sale process – Receipt of judicially approved additional collateral – Receipt of fees and interest payments – Enhanced credit bidding rights – Ability to implement a roll-up of the prepetition debt

into an administrative claim and avoid the risk of cramdown.

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• A bankruptcy case will increase the likelihood that the AAL will not be preserved.

– Opportunity for the other lenders to go outside the terms and

conditions of the agreement – The court may not require the DIP facility to parallel and reflect

the structure that the parties negotiated. – Is the AAL a “subordination agreement” under Section 510 of

the Code: “A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable non-bankruptcy law.”

– Pre-petition rights may be altered. – Different courts rule in conflicting manners; even different

judges in the same court rule in conflicting manners.

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• Enhance the likelihood of prompt

enforcement of the AAL:

– Have the borrower sign an acknowledgement to the agreement

– Have the lenders consent to the jurisdiction of the Bankruptcy Court in the agreement

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PITFALLS AND OPPORTUNITIES FOR FIRST-OUT LENDERS AND LAST-OUT LENDERS WITH RESPECT TO 363 SALES IN BANKRUPTCY

• Many chapter 11 cases today are section 363 sales rather than reorganizations through a chapter 11 plan

• As a result, the rights of FO and LO Lenders in the AAL in connection with a going concern sale of collateral is critically important – Some AALs have more specific provisions on bankruptcy

sales than others – The important point is that the FO and LO Lenders share

one lien – As a result, the Administrative Agent typically will have the

right to consent, or not consent, to a sale of collateral, or to credit bid for collateral, on behalf of all Lenders at the direction of the Required Lenders

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PITFALLS AND OPPORTUNITIES FOR FIRST-OUT LENDERS AND LAST-OUT LENDERS WITH RESPECT TO 363 SALES IN BANKRUPTCY

• As a result, voting provisions in the AAL in connection with section 363 sales are important

• Case law provides that, absent provisions to the contrary in a credit agreement, the administrative agent, acting on behalf of required lenders, can bind all lenders in connection with a release of collateral, or a credit bid, in connection with a section 363 sale

– In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009), affirmed

576 F.3d 108 (2d Cir. 2009) – In re Metaldyne Corp., 409 B.R. 671, 678 (Bankr. S.D.N.Y. 2009) – In re GWLS Holdings, Inc., 2009 WL 453110 (Bankr. D. Del. Feb.

23, 2009) – In re Foamex International (Case No. 09-10560 Bankr. D. Del.)) – In re Westpoint Stevens, Inc. (Case No. 03-13532 Bankr. S.D.N.Y.)

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PITFALLS AND OPPORTUNITIES FOR FIRST-OUT LENDERS AND LAST-OUT LENDERS IN PLAN CLASSIFICATION AND VOTING DISPUTES

• How FO and LO Lenders will be classified under a chapter 11 plan may or may not be expressly addressed in an AAL

• Under the Bankruptcy Code, a class of creditors in a chapter 11 plan accepts the plan if the plan is accepted by at least 2/3 in dollar amount and more than 50% of those creditors in the class who vote on the plan

• As a result, as to dollar amount, if either the FO Lenders or the LO Lenders have at least 2/3 in dollar amount of the debt subject to the AAL, they will want the AAL to state that the FO and LO Lenders should be placed in one class under any chapter 11 plan – Presumably, then, if such provision is respected by the

bankruptcy court, the larger Lender group has a chance of binding the smaller Lender group to any plan

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• Such result is not certain, however – Debt may be repaid prior to bankruptcy thereby altering

the voting dynamics – Not all Lenders may vote on the plan (or debt may be

bought by the borrower’s owners prior to bankruptcy and “pocketed”)

– Also, the bankruptcy court may not follow the classification provision of the AAL (see below)

• In addition, if there are more lenders in the smaller debt group than the larger debt group, the “numerousity” requirement that 50% of the creditors in the class accept the plan may not be satisfied where the smaller group opposes the plan

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• Whether a bankruptcy court will respect a provision in an AAL on classification of FO and LO Lenders is uncertain – Presumably, if the debtor is not a party to the AAL or

otherwise acknowledged the agreement, the argument for bankruptcy enforcement is weaker

– Even if the debtor is a party, however, its agreement as to classification is not necessarily binding

• In addition, again, the FO Lenders and the LO Lenders share one lien – A general principal in bankruptcy is that creditors who

share the same lien are to be classified together in one class under a plan

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• If under a chapter 11 plan the FO and LO Lenders are placed in one class, then all lenders under the AAL likely will receive the same treatment under the plan – Therefore, the intended economics between FO and LO Lenders would have to be

sorted out separately outside the plan between the two groups

• While the FO and LO Lenders could be placed into separate plan classes but still receive the same treatment under the plan, such result would seem somewhat odd and would be subject to challenge as “vote gerrymandering”

• If the FO and LO Lenders were placed into separate classes, then the plan could incorporate the economics of the AAL into the plan’s treatment of the FO and LO Lenders – Such treatment might be challenged in certain respects as inconsistent with the

provisions of the Bankruptcy Code (for instance, if postpetition interest were granted to the FO Lenders where the Lenders under the AAL as a whole were undersecured)

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RIGHTS OF FIRST-OUT LENDERS AND LAST-OUT LENDERS WITH RESPECT TO REORGANIZATION SECURITIES

• Often, subordination agreements will provide that a junior class may receive in a bankruptcy “reorganization securities” (e.g. equity securities) even if the senior class has not been paid in full

• These provisions, often referred to as “x-clauses”, potentially are an exception to the subordination provisions of the agreement and can be a source of confusion and litigation in the event of a bankruptcy

• X-clause or similar provisions may be incorporated into an AAL • If so, then, the LO Lenders may be entitled to receive stock of the

reorganized debtor under a chapter 11 plan even if the FO Lenders are not being paid in full in cash

• FO Lenders may want certain provisions into the AAL with respect to such “reorganization securities,” for instance: – Restrictions on the right to sell such securities pending payment of the FO

Lenders in full in cash – The right in certain circumstances to cause the sale of such securities and

receive the proceeds until paid in full in cash and prior to the LO Lenders receiving any proceeds

– The right to vote such securities in certain circumstances

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PITFALLS AND OPPORTUNITIES FOR FIRST-OUT LENDERS AND LAST-OUT LENDERS IN A CRAM DOWN PLAN

• As long as either the FO Lenders or the LO Lenders have at least 1/3 of the debt or 50% of the lenders under the AAL, they can, if they all vote, avoid acceptance of a borrower’s chapter 11 plan – If the FO and LO Lenders are placed in the same class, they can block

acceptance by that class – If the relevant lenders are in their own class, then can cause that class to

vote against the plan

• However, a debtor can cause acceptance of a chapter 11 plan by a bankruptcy court if it meets the so-called “cram down” requirements set forth in section 1129(b) of the Bankruptcy Code

• In a reorganization (rather than a sale), as to secured debt, this means essentially that the class retains its liens and receives cash payments over time with a present value equal to the value of its interests in its collateral

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• Where the FO and LO Lenders are placed in the same class and the FO Lenders support the plan, but the LO Lenders do not, the LO Lenders may have little leverage in a cram down scenario

• The debtor may be able to cause acceptance of the plan notwithstanding the objection of the LO Lenders by giving the class replacement notes with a high enough interest rate, even if that interest rate may be less than the coupon rate for the deal – Under the AAL, the FO Lenders may wind up still receiving

their “contractual” coupon, and the LO Lenders will solely suffer the consequences of the reduced interest payments

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• Where the FO and LO Lenders are placed in different classes, how the cram down provisions of the Bankruptcy Code are applied is somewhat uncertain

• As noted, if the FO and LO Lenders are treated the same and according to the terms of the relevant credit agreement as a unified group of lenders, it is unclear why the FO and LO Lenders initially should be placed in separate classes – Regardless, in this circumstance, the LO Lenders may assert

that their treatment is insufficient since, economically, they are essentially “second lien lenders”

– If the AAL is enforced outside of the bankruptcy case between the FO and LO Lenders to adjust economics, however, this issue should fall away

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• If the FO and LO Lenders are placed in different classes and treated according to the economics of the AAL, other issues may arise – For instance, the FO Lenders might assert in

this circumstance that their treatment is insufficient if their interest rate is reduced without the ability to recapture such reduction from the LO Lenders

– Again, though, if the AAL is enforced outside of the bankruptcy case between the FO and LO Lenders to adjust economics, this issue should fall away

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• By contrast, the LO Lenders might assert, if their treatment is “worse” than the FO Lenders, that they are being “unfairly discriminated” against in violation of the Bankruptcy Code because, under the relevant credit agreement, they have the same debt and liens as the FO Lenders

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Restructuring Unitranche Loan Facilities: Navigating the ...media.straffordpub.com/products/restructuring-unit... · 30.03.2017 · –Jurisdiction and Enforceability: Will bankruptcy