Comparing Intercreditor Arrangements

Home , Seniority (financial), Senior debt, Subordinated debt

Developments in Legal

KATHERINE E. BELL - Paul Hastings LLP PETER S. BURKE - Paul Hastings LLP MICHAEL GIRONDO - Varagon Capital Partners, L.P. JENNIFER B. HILDEBRANDT - Paul Hastings LLP JENNIFER S. YOUNT - Paul Hastings LLP Introduction commentary and discussion regarding the prevalence of The past several years have been marked by increased the four primary types of intercreditor arrangements in competition among banks and alternative lenders, each the market. The fourth section of this article provides stretching to offer the most attractive financing terms and insights into the factors that influence the determination structures in order to win deal mandates from borrowers as to which type or types of intercreditor arrangement and private equity groups. To remain relevant in this are appropriate for a given transaction. At the end of this competitive market, lenders have become more flexible article is a series of charts which provide, as a reference on terms and adept at structuring transactions that tool, a detailed comparison of certain key provisions across include multiple tranches of debt and/or multiple liens. these intercreditor arrangements. Of course, practitioners These transactions necessitate complex intercreditor should bear in mind that certain of the provisions set forth arrangements among the lenders. in the charts might be the object of negotiations which will lead to different outcomes. With multi-faceted intercreditor arrangements increasingly common in transactions today, and built-in flexibility in Overview and Comparison of Four Primary loan documents to accommodate additional debt and liens Intercreditor Arrangements in a variety of structures on a self-executing, post-closing First lien/second lien: These arrangements involve two basis, it is critical for lenders to have a firm grasp of the separate credit facilities, each secured by its own lien, considerations involved in intercreditor arrangements. typically on substantially the same collateral. One of the The purpose of this article is to provide a comparison of the credit facilities is secured by a first priority lien on the shared key aspects of several of the more common intercreditor collateral and the other credit facility is secured by a second arrangements, with a focus on the following types of priority lien on the shared collateral. An intercreditor structures: first lien/second lien, split collateral, senior/ agreement sets forth the priority of the liens in relation to mezzanine, and unitranche. Of course, the foregoing is not one another and also governs other rights and obligations an exclusive list of all types of intercreditor arrangements, of each group of lenders in relation to the other group of just some of the more common ones. Additionally, it is lenders. There are numerous intercreditor agreements in important to keep in mind that one or more intercreditor the market today and many standard or “market” provisions arrangements are not necessarily mutually exclusive have evolved over time and practice (though certain aspects of other arrangements. In fact, it is not uncommon continue to be the subject of negotiation ). In addition, to encounter, in one transaction, several intercreditor parties may look to sections of the Model Intercreditor arrangements packaged together such as a first lien facility, Agreement developed by the Business Law Section of the a second lien facility and a unitranche (e.g. the unitranche American Bar Association (the “ABA”) in their negotiations. could be in the first lien facility and/or in the second lien It should be noted that intercreditor agreements in large facility). As with other deal terms, market standards and syndicated transactions differ in meaningful ways from terms in intercreditor arrangements change over time and those commonly negotiated in “club” transactions and circumstances. The commentary and comparisons in this intercreditor agreements in “club” transactions are usually article are based on observations from typical transactions much more highly negotiated. over the past couple of years. Split collateral: These arrangements involve two separate An overview and basic comparison of the four primary credit facilities, each typically secured by a lien on intercreditor arrangements follows in the next section substantially the same collateral. One of the credit facilities of this article. The third section of this article provides is secured by a first priority lien on one pool of assets

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and the other credit facility is secured by a first priority that has been developed, but subordination agreements lien on a different pool of assets (and each credit facility (particularly when the mezzanine facility is unsecured) are is usually secured by a second priority lien on its non- relatively straight forward to negotiate. Mezzanine lenders priority collateral). Split collateral transactions are often tend to be flexible in their approach and will customize the entered into when one of the credit facilities is an asset structure of their credit facility for the transaction at hand. based credit facility (an “ABL facility”). The ABL facility priority collateral is generally composed of the assets that Unitranche: These arrangements involve one credit constitute borrowing base assets (typically receivables and facility secured by one lien on one pool of collateral. Debt inventory) and other assets that constitute proceeds of such under the credit facility is separated into a first out tranche assets or are related to such assets. The term loan facility and a last out tranche (this may be handled within the credit priority collateral typically includes everything else (such agreement or in a separate agreement among lenders [the as intellectual property, real estate, equipment, and equity “AAL”]). After certain triggering events have occurred, interests). An intercreditor agreement sets forth the priority payments and proceeds of collateral are applied to the first of the liens in relation to one another and also governs the out tranche prior to application to the last out tranche. rights and obligations of each group of lenders in relation An AAL typically governs the rights and obligations of to the other group of lenders. The general structure of the “first out” group of lenders in relation to the “last out” split collateral intercreditor agreements is similar to those group of lenders. Structures in this market are often highly negotiated in first lien/second lien transactions with some customized to lenders’ preferences. There are no “model critical differences (see the charts at the end of this article form” AALs in the market and there is no real recognition for certain differences). The drafting and negotiation of about what is “market” for various provisions of AALs. each group of lenders’ priority collateral needs to be done Lenders with established precedent for the AAL together carefully and thoughtfully as there are many traps for can operate very efficiently together, which is a key selling the unwary. In addition, the ABL facility lenders usually point for certain borrowers and private equity groups. If need access rights and license rights to certain of the term the lenders do not have established precedent, however, facility priority collateral in order to realize upon the ABL the negotiations can be lengthy. Unitranche facilities are facility priority collateral (such as intellectual property in also viewed by some lenders as more risky than other order to foreclose on the ABL priority collateral) and these structures given that they have not been truly tested in arrangements should be addressed in the intercreditor a bankruptcy. Additionally, some junior lenders view agreement. These provisions are often highly negotiated, unitranche facilities as more disadvantageous than two personalized to a given business, and can be complex. lien structures if the unitranche involves possible interest deferral -- and commonly they do (in comparison, typical Senior/mezzanine: These arrangements involve two two lien structures do not have a payment subordination separate credit facilities, one secured by a lien on component by way of mandatory interest deferral). As substantially all assets and traditionally the other is either a result, the junior lender would need to determine unsecured or secured solely by a pledge of a controlling whether to agree to the interest deferral in exchange interest in the borrower. Sometimes the mezzanine facility for the additional control and the increased uncertainty is secured by substantially all assets on a “silent second lien concerning the enforceability of the restrictions on action basis” (this arrangement is more akin to the first lien/second by a junior lender in a bankruptcy proceeding. lien transaction, but coupled with payment subordination provisions). The mezzanine facility is subordinated in Comments Regarding Yield: A two lien structure will right of payment to the senior secured facility (and thus generally have the lowest all-in-yield in comparison to the mezzanine lenders may be forced to defer interest the other types of structures in a comparable transaction. payments). A subordination agreement governs the rights Unitranche facilities are generally priced at a slight and obligations of each group of lenders in relation to the premium to the all-in-yield of a comparable two lien other group of lenders, including when payments are structure. Over the last two years, however, this premium permitted to be received and retained by the mezzanine has declined while the frequency of two lien structures has lender. There is no model form of subordination agreement increased. Senior/mezzanine arrangements typically have

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the highest all-in-yield of all of the arrangements and often no syndication, speed of execution, one set of payment will involve an equity component in favor of the mezzanine obligations (rather than two), one set of covenants (rather lenders. One note on unitranche facilities, however, is that than two), and one lender group) and all-in yield that is over the long run they may provide borrowers with lower somewhat comparable to (though maybe slightly higher cost of capital because in many circumstances all of the debt than) two lien structures. Unitranche facilities have not amortizes over time in contrast to many two lien or senior/ made their way into the large cap market, however, and are mezzanine transactions, where the first lien or senior debt not widely used in ABL facilities given the complexities amortizes, but the second lien or mezzanine debt does not. associated with the borrowing base. Unitranche facilities pose more of a challenge in transactions where structural Prevalence of Types of Intercreditor flexibility is desired by the borrower (for example, they are Arrangements usually not set up to work seamlessly for multiple cycles of The most common form of intercreditor arrangement over debt or accordions, side cars and other similar features that the last two years has by far been the two lien structure. This provide flexibility to borrowers) and they are less efficient is due to the number of lenders in the second lien market, in syndicated facilities. As a result, they are not as well the relative certainty associated with these structures suited for use in the large cap market. (as mentioned above, there is a more developed market standard for legal documentation for these arrangements The dominance of two lien structures and unitranche and there is less uncertainty about how aspects of these facilities in the market, coupled with more favorable arrangements will be addressed in bankruptcy), and the fact financing market conditions has resulted in slower senior/ that two lien structures can be used in both ABL facilities mezzanine activity over the past couple of years. We would and cash flow facilities. In addition, many borrowers and expect to see an increase in senior/mezzanine structures if private equity groups have recently gravitated towards split financing markets decline or if alternative lenders generally collateral arrangements (a type of two lien structure) in become more sensitive to high leverage. light of the fact that ABL facilities generally have the lowest pricing and often provide more flexibility to borrowers so Factors Driving Choice of Intercreditor long as credit availability is at or above certain thresholds Arrangement and/or the ABL priority collateral is not impacted. Second Every deal requires thorough analysis by the senior lien facilities typically have lower overall interest rates and lenders, the junior lenders, the borrowers and their interest lower call-protection than mezzanine facilities. As a result, holders, and their respective counsel. Below are some of the mezzanine lenders have faced pricing pressure which has factors that influence the determination of the structure for caused many lenders who traditionally only occupied the a transaction: mezzanine space, to pursue second lien facilities instead • Credit analysis of the underlying borrower and financing of mezzanine facilities. In addition, in light of the current market conditions. conditions in energy markets, we expect to see an increase • Lenders’ yield requirements or leverage limitations. in the number of first lien/second lien arrangements or split collateral arrangements because junior lenders will • The identity of the parties involved, and their seek additional protections afforded to secured lenders. frequency (and comfort) working together with the The trend of having lenders who traditionally occupy the particular borrower. mezzanine space move into the two lien market has also • The extent to which the borrower has a significant impacted (and we expect will continue to impact) the two level of working capital assets and is willing to take on lien market on the documentation front because lenders the burden of additional reporting for an ABL facility in comfortable with a different risk profile have entered exchange for the increased flexibility. the negotiations. • Location of subsidiaries and assets and potential local law impediments to lenders taking a security interest or Unitranche facilities have continued to be prevalent in the impediments to multiple security interests. middle market over the past several years due to perceived • Degree of willingness of the junior lenders to defer efficiencies associated with these transactions (little to interest payments.

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• Degree of willingness of the borrower to provide an Conclusion equity component as part of the transaction. Each of type of intercreditor arrangement discussed in • The relative sizes of the senior and junior debt and the this article includes a number of features that are favorable desire by each group of lenders to be able to control their to borrowers and/or lenders. Each also includes features own debt and/or their class in a bankruptcy plan. which are less favorable to borrowers and/or lenders than those that may be contained in other types of arrangements. • The degree of influence of the borrower or private In making choices regarding the structure that is most equity group. Borrowers and private equity are appropriate for a given deal, it is important to factor in typically driven by tax issues and efficiency, cost and the pros and cons involved in the associated intercreditor pricing considerations. arrangements along with the other factors that parties • If the borrower’s leverage is high, senior lenders consider when structuring a deal. This article and the may prefer a senior/mezzanine transaction for its charts that follow will hopefully provide practitioners a contractual subordination. useful resource in structuring and analyzing transactions that include multiple tranches of debt and/or multiple liens.

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Comparison of Intercreditor Arrangements

Feature First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche 1 Structure/ 2 sets of documents 2 sets of documents 2 sets of documents 1 set of documents Documentation 2 Liens/ 2 sets of liens on 1 -2 sets of liens on 1 pool Senior debt is secured 1 lien on 1 pool of Collateral pool of collateral of collateral, with each collateral Mezzanine debt is often lien having first priority on unsecured, but sometimes a different pool of such is secured by equity inter- collateral. ests or on a “silent” second -Pool #1: typically A/R, lien basis. inventory and other related assets. -Pool #2: typically all other collateral, including equipment, intellectual property, real estate, and equity interests. 3 Debt No No Yes for both unsecured A waterfall upon triggering Subordination mezzanine facilities and se- events that generally ap- cured mezzanine facilities. plies proceeds of collateral and payments to first out lenders “first” and last out lenders “last”. There are exceptions. 4 Lien Yes Yes Only if the mezzanine debt See above response rela- Subordination is secured. tive to waterfall feature. 5 Debt Caps Yes for 1st lien. Yes for the ABL facility. Yes on senior debt. Sometimes the first out and/or last out are subject Sometimes for 2nd Sometimes for the term Sometimes for mezzanine to debt caps, but that is lien. loan facility. debt. achieved in a variety of ways. 6 Exercise of Yes for 2nd lien (120 Yes. Sometimes it is Yes. Typically, third party -Yes for the last out Remedies/ days to 180 days). permanent and sometimes mezzanine facilities are lenders. Standstill it is limited to a certain limited to a certain number -Sometimes a brief stand- Period number of days (120 days of days. Sometimes, often still will also apply for the to 180 days). in the case of insider debt, first out lenders. it is permanent. -Sometimes the standstill for one of the tranches (e.g., the first out lenders) is indefinite until a triggering event has occurred. 7 Amendments Operate indepen- Operate independently Operate independently A variety of voting and Waivers dently (short list of (short list of exceptions) (short list of exceptions) constructs exceptions) 8 Buyout Right 2nd lien commonly The term loan lenders com- Sometimes the mezzanine Yes. Last out lenders have has a buyout right. monly have a buyout right. lenders will have a buyout a buyout right. Sometimes right. first out lenders have a buyout right. 9 Bankruptcy Yes Yes Sometimes. If so, very Generally yes, though some Provisions limited if the mezzanine agreements have very lim- facility is unsecured. ited bankruptcy provisions.

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#1 – Structure/Documentation:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche This intercreditor arrangement This intercreditor arrangement This intercreditor arrangement This intercreditor arrangement is used in either asset based is used primarily in asset based is used primarily in deals in is used primarily in cash flow lending deals or cash flow lending deals. which the subordinated debt is deals and occasionally in asset deals. unsecured or where the “junior” based lending deals. The typical structure is: (i) an lenders are otherwise willing The typical structure is either (i) asset based lending facility, There is only 1 set of loan to have their rights to payment a 1st lien asset based facility or and (ii) either a term loan facil- documents. subordinated. a cash flow facility, or (ii) a 2nd ity or bond debt. There is only one lien on one lien term loan facility or bond The senior debt may be either The asset based lending facility pool of collateral. debt. an asset based lending facility is typically secured on a first or a cash flow facility. 1 set of Documents: Typically, both the 1st lien priority basis by accounts facility and the 2nd lien facility receivable and/or inventory and 2 sets of Documents: a.Credit Agreement are secured by the same pool a second priority basis by other a.Senior Secured Credit of collateral: substantially all assets. Agreement assets of the loan parties. The term loan facility or bond b.Subordinated Unsecured 2 sets of Documents: debt is typically secured on a Credit Agreement or Note first priority basis by intellectual a.First Lien Credit Agreement property, equipment, stock, and b.Second Lien Credit real estate and a second prior- Agreement or Indenture ity basis by other assets. 2 sets of Documents: a.ABL Credit Agreement b.Term Loan Credit Agreement or Indenture

#2 – Liens and Collateral:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche Typically, both the 1st lien facil- Typically, both the ABL facility The senior debt is secured by a There is only one lien. The lien ity and the 2nd lien facility are and the term loan or bond debt lien on substantially all of the is typically on substantially all secured by the same pool of are secured by the same pool assets of the loan parties. the assets of the loan parties. collateral: substantially all the of collateral: substantially all Often, the mezzanine debt is 1 Security Agreement. assets of the loan parties. the assets of the loan parties. not secured by a lien on any 2 Security Agreements: 2 Security Agreements: collateral, though in some cases it is either secured by a a.First Lien Security Agreement a.ABL Security Agreement lien on equity interests of the b.Second Lien Security b.Term Loan or Bond Security borrower or on substantially all Agreement Agreement of the assets of the loan parties on a “silent second lien basis”. If the mezzanine debt is unsecured, 1 Security Agree- ment relative to only the senior debt. If the mezzanine debt is secured, then there is either a stock pledge agreement or a security agreement which is identical to the security agreement for the senior debt.

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#3 – Debt Subordination:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche There is no debt subordination There is no debt subordination The main feature of this struc- Whether this structure has in this structure. in this structure. ture is that the mezzanine debt true debt subordination is the is subordinated to the senior subject of debate. This means that the Second The ABL Lenders may receive debt. Lien Lenders may receive payments of principal, interest, A waterfall upon triggering payments of principal (though reimbursement of expenses, This means that, typically, the event that generally applies sometimes the 2nd lien does and payment of fees through- mezzanine debt may receive proceeds of collateral and pay- not amortize), interest and fees out the term of the facility, even regularly scheduled payments ments to first out lenders “first” and reimbursement of ex- after an event of default has of interest and fees and and last out lenders “last”. penses throughout the term of occurred and is continuing. reimbursement of expenses so There are exceptions. the facility, even after an event long as no event of default has Similarly, the Term Loan Lend- of default has occurred and is occurred and is continuing. ers may also receive payments continuing. of principal (though sometimes Typical subordination provi- Voluntary prepayments of the the term loan does not amor- sions: If a payment default has 2nd lien may be subject to tize), interest, reimbursement occurred and is continuing, the restrictions or subject to certain of expenses, and payment of mezzanine lenders are perma- conditionality via the First Lien fees throughout the terms of nently “blocked” from receiving Credit Agreement. the facility, even after an event any payments. If a non-pay- of default has occurred and is ment default has occurred and continuing. is continuing, the mezzanine lenders are blocked for a period Voluntary prepayments of the of time from receiving any term loan may be subject to payments. This is known as restrictions or subject to certain “payment blockage”. conditionality via the ABL Credit Agreement.

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#4 – Lien Subordination:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche Lien subordination is the pri- Lien subordination is also To the extent that the mezza- There is only 1 lien that secures mary feature of this structure. the primary feature of this nine debt is not secured, there both tranches of debt. Thus, structure. would only be 1 lien securing there is no lien subordination in Under lien subordination, the the senior debt. There would this structure. lien of the 1st lien debt is The lien on accounts, inventory be no lien subordination in this senior to and has priority over and other related receivable as- However, a waterfall upon trig- structure. the lien of the 2nd lien debt on sets that secure the ABL facility gering events generally applies the same pool of collateral. (the “ABL priority collateral”) To the extent that the mez- proceeds of collateral and pay- will be senior to and have prior- zanine debt is secured, there ments to first out lenders “first” The “lien priority” is not without ity over the lien on accounts would be 2 liens, and the lien and last out lenders “last”. limits. The 1st lien usually receivable and inventory that subordination provisions in the There are exceptions. cannot secure an unlimited secure the term facility. first lien/second lien structure amount of debt, for example. would apply. In addition, the Typically, the 1st lien only has The lien on the other collateral, debt subordination provisions “seniority” relative to a limited including equipment, intellec- would also apply. debt amount. This is known as tual property, real estate and a “first lien debt cap” equity interests, that secures the term facility (“term loan pri- The Intercreditor Agreement ority collateral”) will be senior contains a waterfall provision to and have priority over the wherein the proceeds of the lien on equipment, intellectual collateral are distributed first, to property, real estate and equity the 1st lien debt (up to the first interests that secure the ABL lien debt cap) and second, to facility. the 2nd lien debt (sometimes up to a second lien debt cap). The Intercreditor Agreement contains a waterfall provision wherein the (i) proceeds of the ABL priority collateral are distributed first, to the ABL debt (sometimes up to a cap) and second, to the term loan debt; and (ii) the proceeds of the term loan priority collateral are distributed first, to the term loan debt (sometimes up to a cap), and second to the ABL debt.

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#5 – Debt Caps:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche Typically, the 1st lien may There are 3 ways of addressing The senior debt is typically The “first out” tranche is some- only have “seniority” relative the debt cap in split collateral subject to a debt cap. times subject to a debt cap. to a limited debt amount. The deals: The mezzanine debt is some- The “last out” tranche is occa- amount of the debt cap is (i)No debt cap on the ABL facil- times subject to a debt cap sionally subject to a debt cap. subject to negotiation. Consid- ity. No debt cap on the term (infrequent). erations include: The caps arise in a variety of loan/bond facility. The considerations for the ways, however. Sometimes the Additions: (ii)Debt cap imposed on the debt cap on the ABL facility are caps are similar to what would •principal amount of 1st lien ABL facility. No debt cap on the similar to those described with be seen in a first lien/second term loan made on closing date term loan/bond facility. respect to a first lien facility, lien transaction and sometimes •the revolver commitment (iii)Debt cap imposed on the though the cap often is a little the caps arise by virtue of vot- (which in some ABL transac- ABL facility. Debt cap imposed larger and usually does not ing arrangements. tions may be limited by the on the term loan/bond facility take into account the size of amount of the borrowing base The considerations for the the borrowing base. in most recent borrowing base debt cap on the ABL facility are certificate received by Agent) similar to those described with •a cushion (typically 10% to respect to a 1st lien facility. 20%) The limitations in high yield •inadvertent overadvances facilities in respect of an ABL •accordion facility is often the greater of a •bank product and hedge fixed amount (which includes a obligations cushion) and a percentage of •the 1st lien DIP all accounts receivable and all Deductions: inventory. •aggregate amount principal payments of 1st lien term loan (other than refinancings) •aggregate amount of permanent reductions of the revolver (other than refinancings) Sometimes the 2nd lien is also subject to a debt cap.

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#6 – Exercise of Remedies/Standstill:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche First Lien Agent has right to The ABL Agent has the right to Senior Agent has right to The Agent has the right to exer- immediately exercise remedies immediately exercise remedies exercise remedies. There is not cise remedies at the direction with respect to any or all of the with respect to the ABL priority a remedies standstill on the of the required first out lenders collateral. There is typically collateral. There is typically not Senior Agent. or the required last out lenders not a standstill on the First a standstill on the ABL Agent’s after the applicable trigger- Typically, the standstill regard- Lien Agent’s right to exercise right to exercise remedies with ing event and any applicable ing unsecured creditor rem- remedies. respect to such ABL priority standstill period. edies in third party mezzanine collateral. The Second Lien Agent is debt is limited to a certain Sometimes a standstill will ap- typically subject to a standstill The Term Loan Agent has the number of days. Typically, this ply for the first out lenders and/ period of 120 to 180 days. right to immediately exercise period would terminate upon or the last out lenders. remedies with respect to the the acceleration of the senior If exercise of remedies by Sometimes the standstill for term loan priority collateral. secured debt (including upon a First Lien Agent is conducted one of the tranches (e.g., the There is typically not a standstill filing of an insolvency proceed- pursuant to Article 9 (i.e., first out lenders) is indefinite on the Term Loan Agent with ing or upon the exercise of commercially reasonable until a triggering event has respect to such term loan prior- remedies by the Senior Agent). manner), Second Lien Agent occurred. ity collateral. Sometimes, often in the case would typically release lien and of insider debt, the standstill is guarantors. The ABL Agent and the Term permanent. Loan Agent are each subject to If the exercise of remedies of a standstill with respect to their If the mezzanine debt is personal property collateral is respective non-priority collat- secured, secured creditor rem- conducted outside of Article 9 eral. Sometimes the standstill edies are subject to a standstill (i.e., a default disposition) but is permanent and sometimes it that is similar to the standstill complies with certain Article is limited to a certain number period for a 1st lien/2nd lien 9 requirements, Second Lien of days. Intercreditor Agreement. Agent would sometimes release lien and guarantors. Second Lien Lenders typically preserve unsecured creditor rights.

#7 – Amendments and Waivers:

First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche Operate independently (short Operate independently (short Operate independently (short A variety of voting constructs. list of exceptions). list of exceptions) list of exceptions) The voting arrangements in Exceptions may include: Exceptions may include: Exceptions may include: unitranche structures are flex- increasing the interest rate, increasing the interest rate, increasing the interest rate, ible and may be structured to fit extending or shortening the extending or shortening the extending or shortening the the specifics of a deal. Parties maturity date, increasing the maturity date, increasing the maturity date, increasing the may utilize a number of differ- principal amount of the debt. principal amount of the debt. principal amount of the debt. ent features, including “forced deadlocks”, “drag alongs”, “tag alongs”, buy-outs, right of first offers/refusals, and standstills to fit the diverse needs of each deal. In addition, a number of deals the voting mechanics in the Credit Agreement are operative until a triggering event occurs and then the consent of the majority of the first out and a majority of the last out would be required.

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#8 – Buyout Right:

First Lien/Second Lien Split Collateral Mezzanine Unitranche Second Lien Lenders usually The Term Loan Lenders usually Sometimes the mezzanine The last out lenders usually have a buyout right. have a buyout right. lenders will have a buyout right. have a buyout right. Occasionally the First Lien Sometimes first out lenders Lenders also have a buyout have a buyout right. right in club deals.

#9 – Bankruptcy Provisions:

First Lien/Second Lien Split Collateral Mezzanine Unitranche Provides that the Intercreditor Typically provides that the Typically provides that the A similar provision is often in- Agreement is enforceable as a Intercreditor Agreement is Subordination Agreement is cluded, though it is not certain subordination agreement under enforceable as a subordination enforceable as a subordination that the AAL would be treated the Bankruptcy Code. agreement under the Bank- agreement under the Bank- as a “subordination agreement” ruptcy Code. ruptcy Code. in a bankruptcy proceeding.

DIP financing: DIP financing DIP financing: DIP financing DIP financing: Typically not ad- DIP financing: Often includes provided or consented to by with a priming lien on the ABL dressed unless the mezzanine a provision similar to the 1st the First Lien Lenders subject priority collateral provided facility is secured. lien/2nd lien provision, but this to a cap and the satisfaction of or consented to by the ABL is not always the case. certain conditions precedent Lenders, sometimes subject to deemed to be consented to by a cap and the satisfaction of the Second Lien Lenders. certain conditions precedent consented to by the Term Loan Lenders. Corresponding provision with respect to the term priority collateral in favor of the Term Loan Lenders.

363 sale: Second Lien Lenders 363 sale: Term Loan Lenders 363 sale: Typically not ad- 363 sale: Typically includes deemed to consent to 363 deemed to consent to 363 dressed unless the mezzanine a provision similar to the 1st sale approved by a majority of sale of ABL priority collateral facility is secured. lien/2nd lien provision, but the First Lien Lenders, subject approved by the majority of may be subject to certain ad- to the satisfaction of certain the ABL debt, subject to the ditional triggering events. conditions. satisfaction of certain conditions. Corresponding provision with respect to the term priority collateral in favor of the Term Loan Lenders.

Plan classification: Provides Plan classification: Provides Plan classification: Typically Plan classification: Often that 1st lien debt and 2nd lien that ABL debt and term debt not addressed unless the mez- includes a provision similar to debt will be separately classi- will be separately classified in zanine facility is secured. the 1st lien/2nd lien provision, fied in a plan. Given that this a plan. Given that this should as well as limitations on voting should be the result, typically be the result, typically does not for certain plans if the claims does not address situation address situation where this is are not so classified, though where this is not the case. not the case. this provision is not always included.

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