Agreements Among Lenders Rights and Remedies of First-Out and - - PowerPoint PPT Presentation

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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

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

• f Bankruptcy

Gregory M. Bilton

gbilton@riemerlaw.com

Brad B. Erens

bberens@jonesday.com

Rachel L. Rawson

rlrawson@jonesday.com

• 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

6

• 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

7

• 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

8

• 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

9

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

10

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)

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

11

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

• bligations 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

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

12

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

13

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

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

14

• 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

15

• 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

16

• 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

17

• 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

CONSEQUENCES THAT MAY RESULT FROM AN EXERCISE OF REMEDIES

18

• 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

• n 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.” CONSEQUENCES THAT MAY RESULT FROM AN EXERCISE OF REMEDIES

19

• Fair warning:

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

CONSEQUENCES THAT MAY RESULT FROM AN EXERCISE OF REMEDIES

20

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”

21

RIGHTS OF LAST-OUT LENDER FOLLOWING COMMENCEMENT OF BANKRUPTCY PROCEEDING

• 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.

22

RIGHTS OF LAST-OUT LENDER FOLLOWING COMMENCEMENT OF BANKRUPTCY PROCEEDING

• 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

• bjection of the FO Lenders, including bidding procedures for

any such proposed sale.

23

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
• pportunity to support its borrower, and

facilitate the Debtor’s plan – implement a sale, a reorganization, or other outcome.

24

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

• 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.

25

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

• 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.

26

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

• 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

27

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

• ne 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

28

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.)

29

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

30

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

• 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

31

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

• 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

• therwise 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

• ne class under a plan

32

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

• 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)

33

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

34

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

35

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

• 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

36

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

• 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

37

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

• If the FO and LO Lenders are placed in different

classes and treated according to the economics

• f 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

38

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

• 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

• f the Bankruptcy Code because, under the relevant

credit agreement, they have the same debt and liens as the FO Lenders

39