Market Tips and Trends for Structuring, Drafting and

Market Tips and Trends for Structuring, Drafting and

Negotiating Loan Documentation

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TUESDAY, APRIL 20, 2021 | 3:00 – 4:00 PM CT

© 2021 Greenberg Traurig, LLP 2

Presentation Overview

1. LIBOR Transition2. Revlon/Erroneous Payments3. Sponsor Finance and Lender Responses 4. Market Developments

LIBOR TransitionPractical Issues in the Implementation

of Alternative Reference Rates

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Sylvie [email protected]

212.801.6923

Graeme McLellan [email protected] +44

(0) 203.349.8729

Oscar Stephens [email protected]

212.801.9202


The IBOR Protocol

• Protocol is Supplement #70 to the 2006 Definitions

• Released on October 23, 2020

• Received antitrust clearance from Department of Justice on October 1


What does IBOR Protocol do?

• Provides fallback rates for various versions of IBOR:

• U.S. LIBOR SOFR

• British LIBOR SONIA

•

• Swiss LIBOR SARON

•

• Japanese TIBOR TONA

• Canadian CDOR CORRA


How does Protocol take effect?• For new derivative transactions, Protocol automatically becomes

effective January 21, 2021


Where are we now?

March 5 – FCAannounces cessation of most USD Libor tenor byJune 30, 2023 and other LIBORs by December 31, 2021


Where are we now?

March 5 – ISDA announces

that FCA announcement is an

Index Cessation Event


Where are we now?

• IBOR Protocol Fallback Provisions become effective:

January 1, 2022 for Euro LIBOR, Swiss Franc LIBOR, Japanese Yen LIBOR, Sterling LIBOR, and one-week and two-week USD LIBOR

July 1, 2023 for all other USD LIBOR tenors


What are issues for loan market?

• Interest rates are different:

Term SOFR – Loan Market

Daily Compounded SOFR –Derivatives Market



• Spread Adjustments are different:

Various Approaches– Loan Market

Five years in arrears–Derivatives Market



• Timing for LIBOR transition:

July 1, 2023 if ARRC fallback language used– Loan Market

July 1, 2023– Derivatives Market


LIBOR Transition

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• ARRC templates widely adopted• Still seeing a bunch of “Amendment Approach” Language

• Too early to see new “abridged” template being adopted

• Trend: consistency with ISDA Protocol• Term SOFR being abandoned/ignored

• “Climb the Waterfall” language rarely seen

• Borrowers still not grasping transition / looking for banks’ direction• NY Law effect TBD

• It does not address fallback to PRIME

• The Devil will be in the Details

LIBOR Transition

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Zero Flooring – but flooring what?

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6 Possible Combinations: Satisfy £RFRWGDaily Flooring?

Comment Seen as Zero floor?

Overnight SONIA Works for new facilities.

Overnight SONIA + CAS Ditto. LMA format 23 Nov. 2020

Daily Non-Cumulative Compounded

(presumably)

Sch. 16.

Daily Non-Cumulative Compounded + CAS

(presumably)

Sch. 16. Closest to LIBOR for part or full interest periods (Most appropriate for transition debt which is syndicated or allows mid-period actions?)

Cumulative Compounded Sch. 17

Cumulative Compounded + CAS Sch. 17. Closest to LIBOR for only full interest periods (Most appropriate for transition debt which is bilateral and no mid-period actions?)


• Transition debt• No zero floor in existing facility, but zero floor now proposed?

• Contrary to FCA Conduct Risk Guidance?

• New debt

• No separate CAS (any amount incorporated into margin)

• Negative floor at amount equal to minus CAS not possible

• Better for banks?

Zero Flooring – Other issues

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Revlon/Erroneous Payments

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Paul Ferak [email protected]

312.476.5013

Kieron Frazier [email protected]

312.456.1052


• Citi, as Administrative Agent, was to pay $7.8 million in interest, but sent $900 million instead

• “Triple-check” system failed; error using “Flexcube” software

• Some lenders returned around $400 million, but others said “no way”

The Revlon Erroneous Payment Issue

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Judge Furman, U.S. Dist. Court“Because the discharge for value defense applies . . . Citibank is not entitled to its money back.”


• Erroneous payment clauses added to new deals in 2021

• Three key aspects in LSTA sample:

• If lender notified by agent of error within “x” days, lender must return the funds within “x” days

• If lender receives an amount different than the payment notice, the lender must promptly notify the agent.

• Lenders agree to waive “discharge for value” defense

• Remaining holes?

The Contract Fix

19* Appendix A – LSTA Working Group Discussion, Revlon Case


• Importance of reviewing process

• Considering outsourcing/use of subcontractors for critical tasks

• Maximizing contract protection

• Using business leverage to obtain results

Things to Consider Going Forward

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Sponsor Finance and Lender Responses

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Todd [email protected] | 212.801.2299

Richard [email protected] | 212.801.6421

Homin [email protected] | 310.586.7752

Audrey [email protected] | 713.374.3537

Lou Ann [email protected] | 214.665.3661

MAERecent Developments

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• Material Adverse Effect (“MAE”) provisions are common in credit agreements and other debt instruments.

• A standard MAE provision in credit agreements defines a MAE as a material adverse effect on (i) the business, financial condition, or results of operations of the borrowers and their subsidiaries (taken as a whole); (ii) the ability of the borrowers and their subsidiaries (taken as a whole) to perform their payment obligations under the loan documents; or (iii) the material rights and remedies (takes as a whole) of the administrative agent and the lenders under the loan documents. The first clause sometimes also includes forward-looking “prospects” of the borrowers.

• Additionally, in most credit agreements, the absence of an MAE since a specified date (e.g., from the date of the latest audited financial statements or from the signing date of the purchase agreement) is required to be brought down as a condition precedent, and required to be a representation and warranty made by the borrower at each borrowing (including for future advances).

• Some credit agreements and other debt instruments might also include a stricter requirement that the occurrence of any MAE results in an immediate Event of Default (regardless of whether there was a particular breach of a representation or covenant).

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Material Adverse Effect (“MAE”)


• As a comparison, in an M&A context, the purchase agreement would typically allocate macro or systematic risks to the buyer (unless the underlying circumstances have a disproportionate and unforeseen impact on the seller’s particular business) and company-specific risk to the seller.

• However, in a Credit Agreement, the MAE clause would not typically include specific carve-outs for macro-level risks or “Acts of God” and do not specifically differentiate between company-specific and industry-specific risks. Therefore, absent any specific carve-out for the effects of COVID-19, courts would have to pursue a fact-specific analysis of whether there is an MAE, which NY courts have viewed to depend on:

• If the subject event

• (1) was unforeseen,

• (2) substantially threatens the overall earning potential of the assets/company, and

• (3) did so in a durationally significant manner.

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Material Adverse Effect (“MAE”)


• Sponsors and their portfolio company borrowers have asked for COVID-19 carve-outs to the Material Adverse Effect definition to prevent Lenders from using the pandemic as a basis for failing to fund under Credit Agreement and/or from declaring a breach of a representation or warranty.

• On a case-by-case basis, Lenders have accepted COVID-19 carve-outs to the Material Adverse Effect definition.

• As an example, such carve-out may state: “provided, that no such event, circumstance, or condition to the extent resulting from or arising out of the COVID-19 pandemic or other epidemiological conditions shall be deemed to constitute, or be taken into account in determining whether there has been, any such material adverse effect.”

• As an alternative, the Lenders may insist that such carve-out be limited to the extent that such COVID-19 impact does not have a “disproportionate effect” on the company/asset.

• Further, some amendments have taken a narrower approach; for example, the amendments may specify that the impact of COVID-19 will be disregarded in ascertaining the accuracy of the bring-down of the representations so that the borrower may borrow under the revolver, or they may be in the form of a one-time waiver for a particular borrowing only.

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Material Adverse Effect (“MAE”) – Borrower Requests


• While we saw several of these requests at the height of the COVID-19 pandemic, we are not seeing MAE carve-outs for COVID-19 being added to new or amended and restated deals.

• As a reminder, all COVID-19 carve-outs need to be escalated to the internal legal team as well.

• Avoid adding the COVID-19 carve-out to the MAE representation itself or the MAE definition because that change would flow through to many other provisions of the credit agreement.

• Tips to negotiating a MAE Covid-19 carve-out from the Lender’s perspective:

• MAE carveouts should be limited to impacts that are directly related to the COVID-19 pandemic.

• Try and limit the carveout to only the Condition Precedent to the closing of amendments or credit agreements, not the Condition Precedent for future advances.

• Limit the carve-out to disclosures made in writing to the Lenders prior to the Closing Date, but only to the extent there have been no material changes to prior disclosures.

• Limit the carveout to the specific disclosures (such as a Lender presentation or a disclosure schedule).

• Limit the carve-out so that it only applies during a limited time period.

Material Adverse Effect (“MAE”) – Lender Responses


Treatment of PPP Loans


• Considerations for PPP Loans under existing credit facilities and refinancings –Accommodations to permit PPP Loans

• Debt Covenant: An express permission for PPP Loans should be specified in the debt covenant section. Lenders generally require that PPP Loan Requirements be satisfied.

• Restricted Payment / Restricted Debt Payment Covenant: An exception to the RP / RDP covenant should be included to permit forgiveness of the PPP Loan.

• Financial Covenants: To the extent that the credit agreement contains financial maintenance covenants (e.g., fixed charge coverage ratio or total leverage ratio tests), PPP Loans should be carved out from any such financial calculations to the extent forgiven (springing if not forgiven). In response, Lenders often exclude the proceeds of PPP Loans for testing liquidity and netting cash from the leverage component.

• Mandatory Prepayments: Borrower / Lenders need to ensure that the proceeds of PPP Loans are carved out from any mandatory prepayment requirement tied to debt incurrence since PPP Loans are not permitted to be applied to pay down principal on other indebtedness.

• Other Issues: Control agreement; subordination (lien vs. payment priority); cross-default provisions, etc.

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Treatment of Paycheck Protection Program (“PPP”) Loans in Credit Agreements


• PPP Loan Requirements that need to be satisfied during the time period in which the PPP Loans remain outstanding:

• Compliance with applicable eligibility requirements of the CARES Act (e.g., that PPP Loan shall constitute a “covered loan” and use of proceeds in accordance with the CARES Act);

• Obtaining forgiveness within the specified time period required under the PPP Loan Documents or the CARES Act, as applicable, but in any event on or prior to a certain date specified by the Lenders;

• Maintenance of records and customary Lender notice requirements;

• Interest rate cap of 1.00% per annum;

• Unsecured and not to be guaranteed by any Subsidiary; and

• Block on amendment of PPP Loan Documents in manner adverse to the Lenders, etc.

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Treatment of Paycheck Protection Program (“PPP”) Loans in Credit Agreements


• Change of ownership triggers under the SBA Procedural Notice: • At least 20% of equity interest of PPP borrower sold or transferred;

• Sale of at least 50% of PPP borrower’s assets; or

• Merger of PPP borrower with or into another entity.

• Pre-requisites to avoid SBA prior approval:• Submission of forgiveness application prior to consummation of the underlying transaction effecting a

change of ownership; and

• Establishment of an interest-bearing escrow arrangement, with funds equal to the outstanding balance of the PPP loans, and controlled by the PPP Lender of such escrow account.

• After completion of the forgiveness process, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest.

• In all cases, the PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

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M&A Transactions and PPP Implications

Financial Covenant Relief Requests and Considerations


Common Borrower Requests for Financial Covenant Relief

• Financial covenant holidays

• Reset of financial covenant levels (in lieu of holiday or in addition to holiday)

• Larger amounts of cash netting (to the extent it not already unlimited)

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• Equity cures – Injection by sponsor of additional capital to remedy a financial covenant breach

• Financial covenants will be retested on a pro forma basis taking account of the capital injection

• Equity or Subordinated Debt

• Amount of Equity Cure – amount needed to satisfy the financial covenant vs. “overcure”

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• Lenders should consider what credit enhancements they request in exchange for any covenant relief should (and whether they should apply for a certain period).

• Increase in Pricing

• Inclusion of Minimum Liquidity Covenant

• Additional reporting requirements• 13-week cash flow reporting

• Monthly reporting

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• Resizing of baskets and/or inclusion of caps in certain negative covenants

• Additional Collateral or Guarantees

• Additional Insight into Governance and Operations• Board observer seat

• Delivery of board materials

• Other Additional Requirements • Implementation of a chief financial officer or a chief restructuring

officer

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EBITDA AddbacksRecent Developments


• Covid-19 - Cost Related Addbacks• Many non-recurring or extraordinary cost addbacks in “typical” EBITDA definition

may already apply

• General Covid-19 cost addback

• Alternatively, specific addbacks for:• PPE costs

• Sanitation and cleaning expenses

• Ventilation expenses

• Structural or other physical adjustment costs

• Hazard pay expenses

• IT expenses related to work at home

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Covid-19 Related Addbacks


• Covid-19 – Lost Revenue Addbacks• “Typical” EBITDA definition would traditionally not provide an

addback for lost revenues related to Covid-19

• Some recent transactions have attempted to normalize for lost revenues resulting from Covid-19

• Specific Covid-19 lost revenue addback

• Very difficult to ascertain

• Regeneration of “deemed” EBITDA

• Annualization of revenues upon “re-opening”

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• Covid-19 Related Addbacks - from a Lender perspective• During the height of the pandemic, we saw troubled Borrowers use creative

interpretations of the EBITDA add-backs to try and avoid covenant defaults. • Escalate to JPM legal if a Borrower contends that COVID losses/expenses are

“non-recurring” and/or constitute a “natural disaster”. • In new middle-market facilities, while we have seen specific COVID cost-related

addbacks, we have not seen Borrowers request COVID lost revenue addbacks.• Lenders tend to prefer hard dollar caps and then % caps.

• In syndicated deals, these cost-related addbacks may even require approval of the Agent.

• Always a good idea for the compliance certificate to require the Borrower to calculate addbacks on a line item basis.

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• Expanded acceptance of addbacks for “run rate” cost savings, synergies, restructuring, de novo and general non-recurring expenses

• Often subject to an individual or joint cap based on % of EBITDA

• Addbacks for “run rate” revenues from new contracts or business lines

• Broad QofE-based addback for future Acquisitions

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Other Recent Trends In EBITDA Addbacks

Market Developments

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Lou Ann [email protected]

214.665.3661

Arleen [email protected]

612.259.9711


• SPACs – Special Purpose Acquisition Companies

• JCrew/Revlon – Liability Management Transactions

Latest Market Developments in Credit Agreement Documentation


• SPACs - Special Purpose Acquisition Companies

• SPACs are “hot” right now and prevalent in the market.

• Borrowers may request SPAC provisions into the Credit Agreement so that they can avoid having to get additional Lender consents before the Borrower is taken public via a merger with a SPAC.

• There are numerous provisions of the Credit Agreement that should be considered including:

• Change in Control – any provision permitting a change in control without triggering an Event of Default must be raised as soon as possible to the primary JPM credit and legal contacts on the transaction.

• Fundamental changes – merger with a SPAC would need to be permitted. Also consider whether there are other reorganization transactions that need to be permitted.

• Restricted Payments – The Borrower may need to make restricted payments to its current equityholders as part of the SPAC consummation or may need to enter into certain tax agreements related to the SPAC.

• Financial Reporting - Address any financial reporting changes as a result of the consummation of the merger with the SPAC.

• Collateral and Guaranty package - Make sure the Loan Parties are in compliance with collateral and guarantee requirements after giving effect to the merger with the SPAC so that the Lenders’ collateral and guaranty position is not weakened.



• Drop-Down Financings: Structural Subordination


Typical Structure Applicable Credit Agreement Provision

Formation of a NewCo • Definition of Unrestricted Subsidiary and Subsidiary designation provisions

• Collateral and guarantee requirements/excluded subsidiary provisions

Transfer of assets to NewCo (often accompanied by a license of transferred asset back to the borrower)

• Investments, Asset sales, Sale leaseback covenants• Collateral release provision• Limitations on release of all or substantially all of the collateral

Incurrence of new structurally senior debt by NewCo • If applicable, restrictions on unrestricted subsidiaries guaranteeing, or being guaranteed by, credit parties

• If incurred at or guaranteed by an excluded restricted subsidiary, debt and lien capacity (subject to any non-guarantor caps or sublimits)

Exchange or roll up of all or a portion of any existing loans for the new structurally senior debt

• Pro rata sharing provisions• Borrower buybacks or Dutch auction provisions• Limitations on prepayments of “junior debt” (if applicable)


• Uptiering Transactions: Contractual Subordination


Typical Structure Applicable Credit Agreement Provision

Incurrence of new debt by the borrower that is senior to existing loans.

• Debt and lien covenants• Limits on subordination of existing debt

Exchange/roll up of all or a portion of any existing loans into senior debt that is pari with or junior to the new money loans (the “New Superpriority Debt”) but senior to the existing loans (the “Rolled Up Superpriority Debt”)

• Pro rata sharing provisions• Borrower buybacks or Dutch auction provisions• Limitations on prepayments of “junior debt” (if applicable)

The New Superpriority Debt and the Rolled Up Superpriority Debt may take the form of: • a new tranche of loans within the loan document, with priority governed by a payment “waterfall”; or• new loans under a separate credit facility, with priority governed by an intercreditor agreement.

• Pro rata sharing/waterfall provisions (including related amendment requirements)

• Subordination/release of all or substantially all collateral• Intercreditor restrictions


• Possible Documentation “Fixes” for Liability Management Transactions

• “Notwithstanding anything herein to the contrary, in no event shall [(i) any Loan Party contribute, or otherwise invest, any [Material Asset] in, or Dispose of any [Material Asset] to, any Subsidiary that is not a Loan Party,] 2 (ii) any Restricted Subsidiary contribute, or otherwise invest, any [Material Asset] in, or Dispose of any [Material Asset] to, any Unrestricted Subsidiary or (iii) any Subsidiary be designated as an Unrestricted Subsidiary if such subsidiary owns any [Material Asset].”

• “Material Asset” means any [asset] owned by any Loan Party that is, [in the reasonable determination of the Borrower], material to the operation of the business of the Borrower and its Restricted Subsidiaries, taken as a whole”

• “[No amendment, waiver or consent shall] without the prior written consent of each Lender directly affected thereby, (i) subordinate, or have the effect of subordinating, the Obligations hereunder to any other Indebtedness, (ii) subordinate, or have the effect of subordinating, the Liens securing the Obligations to Liens securing any other Indebtedness, or (iii) modify Section [include pro rata sharing, pro rata treatment, post default waterfall an borrower/affiliate buyback mechanics if appropriate] or any other provision hereof in a manner that would have the effect of altering the ratable reduction of Commitments or the pro rata sharing of payments otherwise required hereunder.”


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AnyQuestions?

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Questions & Feedback