LMA Webinar Introduction to the LMA Leveraged ... · Lo an Market Association th e a ut h oritative v o ice of the EMEA m a rk et Introduction –Drafting assumptions –Structure

LMA Webinar Introduction to the LMA Leveraged Intercreditor Agreement Toby Mann, Senior PSL – Clifford Chance

Loan Market Association

the authoritative voice of the EMEA market

Introduction

– Drafting assumptions

– Structure and key terms of the LMA Leveraged Intercreditor Agreement

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Drafting basis

– Why have an intercreditor agreement on a transaction?

– Different levels of debt

– Reflect commercial deal that some levels of debt are

intended to have priority over others

– Regulate security package

– Has to reflect the debt structure

– Designed for use in conjunction with the LMA Leveraged

Primary Document

– First issued 2009; significant update 2012 3



Drafting basis (cont’d)

– Similar assumptions to those made in the Leveraged

Primary Document

• English law

• Members of the Group are all English companies

• Same debt structure

• Starting point only

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Assumed structure

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Mezzanine Lenders Mezzanine Loan

Senior Lenders Senior Loan

(Term Facilities A, B

and C plus Revolver)

Subsidiary 1 Subsidiary 2 Subsidiary 3

Target

Company

(Purchaser)

Equity Investment by

way of Loan Notes

Equity Investment by way of

subscription for Shares of Parent

(including Preference Shares)

Vendor Vendor Note

(deferred Purchase

Price)

Parent Subscription for shares of Company

(downstreaming equity investment) and

Intra-Group loans Intra-Group loans Hedge

Counterparties

Structural Intra Group Loan

(downstreaming equity investment)

Investors



Assumed structure (cont’d)

– Senior term and working capital revolving facilities (includes

provision of Ancillary Facilities and Letters of Credit)

– Interest rate and exchange rate hedging liabilities relating to

the Senior Facilities and, potentially, the Mezzanine Facility

– Mezzanine Facility

– Intra-Group debt

– Structural Parent debt 6



Assumed structure (cont’d)

– Vendor Notes (optional)

– Investor debt – Loan Notes and Short Term Loans (optional)

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Anatomy and key terms

– Section 1: Interpretation

– Section 2: Ranking and Primary Creditors

– Section 3: Other Creditors

– Section 4: Insolvency, Turnover and Enforcement

– Section 5: Non-Distressed Disposals, Distressed Disposals and

Claims

– Section 6: Proceeds and Qualifying Senior Facilities Refinancing

– Section 7: The Parties

– Section 8: Additional Payment Obligations

– Section 9: Administration

– Section 10: Governing Law and Enforcement 8



Section 2 – Ranking and primary creditors

– Ranking of debt (Clause 2, Clause 10, Clause 18)

• Secured debt

– Senior Facilities and Hedging Liabilities (rank first and pari passu)

– Mezzanine Facility (ranks second)

• Unsecured debt

– Intercompany debt

– Structural Parent debt

– Vendor Notes (if included)

– Investor Loan Notes and Short Term Loans (if included)

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Section 2 – Ranking and primary creditors (cont’d)

– Controls on Senior Lenders (Clause 3)

• Size (Clause 3.3(a), (d), (e), (f))

– Senior Headroom

• Margin (Clause 3.3(b))

– Senior Yield Headroom

• Fees (Clause 3.3(c))

– Senior Yield Headroom

– Amendments and waivers

– Flex rights

• Increased payments (Clause 3.3(h)) 10




– Hedge Counterparties (Clause 4)

• Identity and number (Definition of “Hedge Counterparty”)

• Type of hedging (Definition of “Hedging Agreement”)

• How much hedging? (Clause 4.13)

– Payments (Clauses 4.2 and 4.3)

• Scheduled payments (Clause 4.3(a)(i))

• Tax gross-up / costs and expenses (Clause 4.3(a)(ii))

• Close-outs (Clause 4.3(a)(iii), (iv))

• Hedge Counterparty Insolvency/Force Majeure (Clause 4.3(a)(v))

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– Enforcement Action (Clauses 4.8 and 4.9)

• Non-Credit Related Close-Out (Clause 4.9(a))

– Reducing hedging

– Illegality, Tax Event, Tax Event upon Merger, Force Majeure

• Credit Related Close-Out (Clause 4.9(a))

– Distress Event

– Non-Payment

– Insolvency

– Refinancing of Senior Facilities

• Nuisance right to sue (Clause 4.9(b))

– Voting (Definition of “Senior Credit Participation”)

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– Mezzanine lenders (Clause 5)

– Payments (Clauses 5.1 to 5.6)

• No payment of principal allowed (Clause 5.2(a))

– Illegality

– Right of cancellation/repayment in relation to a single lender

– Mandatory prepayments after Senior Facilities repaid

• Others (Clause 5.2(a))

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– Payment Stop

• Automatic on Senior Payment Default (Clause 5.2(a)(i)(C))

• Other Mezzanine Payment Stop Event (Clause 5.2(a)(i)(B) and Clause 5.3)

– Any Event of Default?

– Event of Default which Majority Senior Creditors consider material?

– Specified Events of Default only?

• Adviser costs (Clause 5.2(a)(iii))

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– Amendments (Clause 5.8)

• size (Clause 5.8(b)(i))

• repayment schedule (Clause 5.8(b)(ii))

• interest and fees (Clause 5.8(b)(iii))

• additional payments (Clause 5.8(b)(iv))

• more onerous obligations under commercial provisions (Clause 5.8(b)(v))

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– Security (Clause 5.10)

– No Enforcement Action (Clause 5.11 and 5.12)

• Mezzanine Standstill Period (Clause 5.12(a)(ii))

• May match Seniors (Clause 5.12(a)(i))

– Mezzanine option to purchase Senior Facilities (Clause 5.14)

– NB: Mezzanine community perspective

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Section 3 – Other creditors

– Intra-Group Lenders, Parent, Vendor and Investors

• Generally heavily restricted in terms of payments, amendments, security

and enforcement

• Payments of Intra-Group debt permitted until Event of Default/Acceleration

• NB: Borrower perspective – Intra-Group provisions very restrictive

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Section 4 – Insolvency, turnover and enforcement

– Turnover (Clause 10)

• Creditors pay recoveries to the Security Agent, which distributes them

according to the ranking

• When?

– not a permitted payment (Clause 10.2(a))

– after any acceleration or any enforcement (Clause 10.2(c))

– after insolvency (Clause 10.2(e))

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Section 4 – Insolvency, turnover and enforcement (cont’d)

– Insolvency (Clause 9)

• Game over. New rules apply

• All levels of Creditors may enforce their rights

– NB

• Security Agent can co-ordinate

• Receipts subject to turnover

– Why?

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Section 4 – Insolvency, turnover and enforcement (cont’d)

– Enforcement of Transaction Security (Clause 12)

• Single security package held by Security Agent for the Primary Creditors

• Distinction between commencing and manner

– Senior Lenders/Hedge Counterparties generally in charge

– Mezzanine right to commence

– Senior Lenders/Hedge Counterparties have the right to

take over the enforcement process at any time

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Section 5 – Non-distressed disposals, distressed disposals and claims

– Distressed Disposal (Clause 14)

• Disposal in an enforcement scenario

• Release of relevant Transaction Security and the release and/or disposal of

liabilities on a share sale (Clause 14.1)

• Value protection (Clause 14.4)

• Increasingly a flashpoint in negotiations

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Section 6 – Proceeds and qualifying senior facilities refinancing

– Equalisation (Clause 19)

• Provides for balancing payments between Senior Lenders and Hedge

Counterparties following enforcement

• When?

• Operates pro rata to outstandings not commitments

• Optional clause – depends on deal structure/commercial agreement

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Speaker contact details

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Toby Mann

Senior PSL, Clifford Chance

+44(0)20 7006 8864

[email protected]

mailto:[email protected]

Documents

LMA Webinar Introduction to the LMA Leveraged ... · Lo an Market Association th e a ut h oritative v o ice of the EMEA m a rk et Introduction –Drafting assumptions –Structure