Hands Off My : The Impact of on a Wide Variety of Financing Structures

Presented at the 44th Annual Seminar on Bankruptcy Law and Rules, Atlanta, Georgia March 22 –24, 2018

Manuscript:

Alan W. Pope Moore & Van Allen PLLC

Discussion Panel:

The Honorable Paul Baisier Judge, United States Bankruptcy Court Northern District of Georgia

Reginald Dawson Wells Fargo Bank, N.A.

David L. Eades Moore & Van Allen PLLC

Alan W. Pope Moore & Van Allen PLLC

Introduction

In preparing this manuscript, I sought to strike a balance between the legal and the

practical. What on earth do I mean by that? Any presentation that in its title refers to a

“Wide Range of Financing Structures” risks biting off more than it can chew. Financing

structures are influenced not only by the underlying product being offered but by the

market in which the financing is offered. For example, traditional leveraged finance

products being offered to large companies at the behest of firms enjoy the

benefits of trade groups such as the LSTA,1 which recites as one of its core functions the

standardization of legal documentation. Add the increasing use of “precedent”

documents that are used to establish “Documentation Principles”2 at the term sheet stage,

and you can easily make the case that the larger the deal, the easier the negotiation and

documentation.3

Move down market, and the negotiation and documentation of any financing structure begins to look more like the Wild West. Lenders have greater leverage in the negotiations with smaller borrowers, and savvy junior capital providers are more willing to heavily negotiate intercreditor terms. As a practitioner who bores easily, I find this

“middle market” to offer more fodder for discussion, particularly with respect to rights in collateral.

1 The Loan Syndications and Trading Association. Definitely visit www.lsta.org. 2 For those unfamiliar with the concept, many private equity funds prepare the initial drafts of their financing terms sheets and incorporate “Documentation Principles” which in effect, reference another credit facility and require that the contemplated new credit facility track the various covenants, definitions and related terms. 3 Given that many of these larger financings are broadly syndicated, participant lenders generally defer to the arrangers on terms, particularly where the financing is oversubscribed. In turn, many participants engage in only limited review of the loan documentation, perhaps under the arguable assumption that a secondary trading market will exist and allow for an exit, if the credit becomes distressed. 2

So for those practical reasons, I have focused this discussion on middle market intercreditor agreement negotiations that arise from different financing structures.

Bankruptcy is the ever-present legal backdrop to those negotiations in terms of (i) the rights of the parties in and to collateral and (ii) the enforcement of the resulting intercreditor agreement.

Financing - what kind of financing?

Loans, hedges, treasury management products, capital leases, aircraft leases, letters of credit, note issuances, securitizations, factoring: the number and types of financial products being offered in the marketplace constantly increases, evolves and grows. A hornbook4 could not cover this topic with respect to all of these products, so this manuscript will limit itself to traditional finance. Depending on the financing provider, debt finance often incorporates other products (e.g., letters of credit, hedging, treasury management) into the obligations established by the underlying credit facility, and their inclusion, with limited exceptions, does not alter the basic principles discussed herein. Debt finance does, however, offer a number of intercreditor structures to explore.

Second Transactions

A good starting point is the first lien/second lien financing structure, where the name says it all. This structure involves a “first lien” loan secured by a senior priority lien in substantially all of the assets of a borrower, and a “second lien” loan, established under a separate credit facility and secured by a junior priority lien in the same collateral.

The second lien facility is not subject to debt , and, as such, shares in any unencumbered assets. The competing in the collateral require a separate intercreditor agreement to establish the subordination of the junior . Of

4 Are these still around? 3 course, traditional lien subordination language takes up about 2 pages of an otherwise 50 plus page document. Why? Because, to steal from the title of this manuscript, the first lien lender also wants the second lien lender to keep its “Hands Off My Collateral”. In other words, the intercreditor agreement is more about controlling the conduct of the competing lienholder.

Why does this conduct matter? at a borrower may result in the first lien lender and the second lien lender having very differing views as to the best workout strategy for the borrower. Given its senior in the collateral, the first lien may see asset sales or as a viable exit strategy, while the second lien lender, who often is relying on “enterprise” value rather than hard asset value, may want to preserve the business intact for a non-distressed sale or debt-for-equity reorganization.

To that end, the first lien lender seeks to control pre-bankruptcy conduct in certain areas by obtaining agreements that:

• the second lien lender will not act against the collateral if the second lien

facility is in default (i.e., a remedy standstill) for a period of time,

typically 120-180 days after notice of such default and/or acceleration;

• the second lien lender will not interfere with an exercise of remedies by

the first lien lender;

• waive the second lien lender’s rights arising out of the second lien lender’s

status as a secured (e.g., appraisal, marshalling);

4

• allow for the first lien lender to work with the borrower to conduct a

consensual post-default sale of assets for which the second lien lender

must release its liens and, often, any related subsidiary guarantees; 5 and

• restrict the amendment of the second lien facility.

Please note that my focus here is on those agreements related to the collateral; there are numerous other waivers and restrictions in an intercreditor agreement dealing with more administrative matters (i.e., insurance, caps on debt amounts, assignment of the first lien or second lien obligations) that exceed the scope of this discussion. That being said, the primary principle at play is that a first lien creditor wants unfettered discretion in the and sale of its collateral so as to approximate treating the second lien lender as if it were an .6 In the middle market, intercreditor negotiations increasingly focus on the sale and release of collateral outside of bankruptcy in acknowledgement of the (i) often prohibitively high administrative costs of bankruptcy and (ii) the possible diminution in the value of the enterprise simply as a result of being in bankruptcy.

Sometimes, a bankruptcy is inevitable whether because of the degree of the distress, the nature of a proposed asset sale or the inability to obtain consent from a necessary stakeholder. The desire of a first lien creditor to retain unfettered control over the collateral now has a different legal framework, with the second lien lender picking up additional rights as a under the Bankruptcy Code. The same types of

5 Practice point: we usually see language regarding the release of claims by a credit party in connection with the sale of of any such party; a junior creditor must be very careful to exclude its borrower from any such release, or it may result in a non-consensual forgiveness of the borrower’s debt. 6 The absence of an effective waiver of the rights of the second lien lender may lead to a “little something for the effort” moment and the resulting payment of a consent premium to the subordinated party. 5 agreements obtained for the out-of-court situation now have their bankruptcy corollaries.

At a basic level, a first lien creditor seeks agreements that:

• allow the first lien lender to consent to cash collateral use under §363 and

priming DIP financings under §364 and waive the rights of the second lien

lender to object to such actions on the basis of a lack of adequate

protection;

• allow the first lien lender to consent to carve-outs for professional and US

Trustee fees;

• allow the first lien lender to consent to sales and dispositions of collateral

under the §363 and related provisions (and require the second lien lender

to consent to such dispositions);

• limit the ability of the second lien lender to seek cash adequate protection

payments;

• control the distribution of collateral proceeds;

• limit the ability of the second lien lender to seek relief from the automatic

stay;

• establish that the claims of the first lien lender and the second lien lender

must be separately classified under any plan or reorganization, and, if not,

that any distribution is treated as if the claims had been separately

classified; and

6

• prohibit challenges by the first lien lender and the second lien lender to the

other lender’s liens.

Recognizing that a regurgitation of every waiver in a second lien intercreditor does not serve this discussion, I would say that if a drafting attorney had addressed each of the above topics in an intercreditor, the document would be 80% of the way there.

Why only 80%; isn’t that a C+ in school? The answer lies in the constant evolution of intercreditor agreements, and the lessons learned during the financial crisis when many of these agreements were tested in bankruptcy. Also, bankruptcy practice itself has created additional waivers on a “lessons learned” basis after first lien lenders were forced to pay a consent premium. Consider the following:

Diminution Claims. A second lien lender may receive adequate protection under

§363 or §364 of the Bankruptcy Code, raising the question as to whether such payments be treated as the receipt of collateral proceeds. The bankruptcy court in the In re Energy

Futures Holdings Corp.7case held that cash adequate protection payments were not collateral proceeds under the terms of the applicable intercreditor agreement, but rather were simply payments in respect of diminution. However, the same court also was willing to enforce the intercreditor terms as against the parties, begging the question as to whether the intercreditor agreement could have addressed this issue directly and with a different result.

7 See Delaware Trust Co. v. Wilmington Trust, N.A. (In re Energy Future Holdings Corp.), 546 B.R. 566 (Bankr. D. Del., Mar. 11, 2016). Still under appeal – Delaware District Court 1:17-cv-00540-RGA. Oral argument was heard on 11/7/2017. 7

A conscientious attorney seeking to avoid this result could look to the ABA

Model First Lien/Second Lien Intercreditor Agreement8 and include language from

§6.4(c)(3) of the form, which reads:

Any claim by a Second Lien Claimholder under section 507(b) of the Bankruptcy

Code will be subordinate in right of payment to any claim of First Lien

Claimholders under section 507(b) of the Bankruptcy Code and any payment

thereof will be deemed to be Proceeds of Collateral….

Inclusion of this provision could have altered the outcome of the case given the court’s apparent willingness to apply strictly the terms of the intercreditor agreement.

Similarly, as administrative expenses must be paid in cash in full as a condition to confirmation of a plan of reorganization9, a first lien lender must also contemplate that a second lien lender can use a large diminution claim to otherwise prevent confirmation of a plan supported by the first lien lender. Consistent with the theory of attempting to take away the rights of the second lien lender arising out of its status as a secured creditor, the ability to use the diminution claim as a weapon can be further mitigated by adding that any such §507(b) claim may be satisfied under §1129 by distributions of debt, equity, cash or other consideration:

provided … Second Lien Claimholders will be deemed to have agreed pursuant to

section 1129(a)(9) of the Bankruptcy Code that such section 507(b) claims may be

8 Committee on Commercial Finance, American Bar Association Section of Business Law, Report of the Model First Lien/Second Lien Intercreditor Agreement task force, 65 Bus. Law. 810 (May 2010) (the “ABA Model”). 9 11 U.S.C. §1129(a)(9)(A). 8

paid under a plan of reorganization in any form having a value on the effective

date of such plan equal to the allowed amount of such claims.10

Avoidance Actions Carve-Outs. Secured have learned that U.S.

Trustees and unsecured creditors’ committees will strenuously object to pre-petition secured creditors getting adequate protection liens on, or super-priority administrative status in connection with, chapter 5 avoidance actions. And they will win. Why? Don’t ask me. It’s tradition. Usually, the best you can hope for is maintaining basic administrative claim status in connection with chapter 5 action recoveries (which you get under §364(a) automatically anyway). Extrapolating that problem to first lien and second lien debt, first lien lenders have learned that adequate protection packages for DIP financings must often disclaim at the outset any potential §507(b) priority to the extent that priority would apply to chapter 5 actions and their proceeds.11 A second lien lender seeking to gain leverage in a bankruptcy where it is unhappy for whatever reason, may view the refusal to disclaim its rights to chapter 5 actions as a chance to get “a little something for the effort” out of the first lien lender. To that end, an attorney should consider language to the effect of: “Second Lien Lender agrees that upon the request of the First Lien Lender that the Second Lien Lender shall waive its right to distribution of proceeds of (or other interest in) Avoidance Actions in respect of any claim granted to any Second Lien Claimholder in connection with the DIP Financing or cash collateral usage or otherwise arising under Section 507(b) of the Bankruptcy Code.”

10 §6.4(c)(3) of the ABA Model. 11 There’s one exception to the carve-out that lenders should strive to keep as part of the deal: Section 549 actions — at least to the extent that they concern the recovery of what was, before the avoided transfer, the DIP lender’s collateral. Call this your carve-out to the carve-out. 9

§1111(b). This section of the bankruptcy code is often viewed like questions surrounding tax issues, something so mind numbing that you prefer to ignore it with the idea that you will go find an expert on the subject in your firm if you ever need one.

However, in the world of middle market cash flow lending, I view §1111(b) as a shield to protect a secured creditor from having its claim bifurcated and a plan crammed down on the lender. In short, §1111(b) allows a secured creditor to elect to have its obligations treated as completely secured — the so-called §1111(b) election — or it can allow the claim to be bifurcated into unsecured and secured portions. The knock on impact of the election may be that an exit facility can no longer be obtained to allow for confirmation of the plan the secured creditor did not support. Taking this concept further, what happens if a competing second lien lender makes an §1111(b) election in a plan supported by the first lien lender? Could it kill that plan? Possibly, and that’s a fair enough reason to require the second lien lender to obtain the consent of the first lien lender to the making of any §1111(b) election.12

So, now you would be up to a Gentlemen’s B or maybe even an A- if you have an easy grader. The larger principle though is that an attorney representing a first lien lender must place a premium on “gaming out” how the various rights that attach to secured debt, whether by statute or practice, can be used by another lender and seek to negotiate those rights away.

Split Lien Transactions

Second lien debt serves as a model for subordination related to collateral that

translates into different financing structures. Those other structures include split lien

12 Note that the ABA Model does not take this position. 10

transactions where one lender has a first lien on the working capital assets of a business

and a second lien on the fixed assets of the business. Another term lender has first lien on

the fixed assets of the business and a second lien on the working capital assets13 of the

business. More often than not, the lender with the first lien on the working capital assets

is a traditional asset based lender who has underwritten the accounts receivable and

inventory of the business. The subordination structure of second lien intercreditor

agreement applies equally to this financing structure, but with the added complexity of

having to define the relative “priority” collateral and “junior” collateral of each lending

group. A temptation exists in these transactions to simply view the intercreditor

agreement as establishing symmetrical rights with respect to the lien and

subordination for each lender; however, additional issues are raised by the structure itself.

Proceeds of Priority Collateral. The blanket lien subordination present in

second lien transactions allows the parties to ignore the fact that assets may shift and

transform from one collateral category under Article 9 of the Uniform Commercial Code

to another category. Split lien lenders must contemplate situations where its priority

collateral may transform into junior collateral. An easy example is the use of cash

created by accounts receivable (working capital assets) to purchase equipment or real

estate (fixed assets). Conversely, fixed assets may be sold with the proceeds taking the

form of an instrument or a payment intangible, both of which are typically the priority

collateral of the ABL lender. Accordingly, the lenders must extend their subordination

provisions to (i) recognize ordinary course transformations as part of the transaction or

13 Accounts, Inventory, Instruments, Payment Intangibles, Cash, and Deposit Accounts (each as defined in the Uniform Commercial Code). As discussed later in this manuscript, other categories such as General Intangibles require greater analysis. 11

(ii) establish tracing principles for proceeds of the lenders priority collateral. The result is typically somewhere in between with non-ordinary course “transformations” leading to segregation of the proceeds for the benefit of the original priority lender.

Collateral Allocation. While the general split of the collateral described above is accurate, the split lien financing structure also requires a lender to contemplate what rights are necessary to maximize the value of its priority collateral. Assume for a moment that the borrower under a split lien facility is a manufacturing facility with a proprietary process line that turns raw materials into valuable finished product. In order for the lender with a priority lien on the fixed assets (i.e., real property and equipment) to maximize value in those assets in connection with a sale or other disposition, it must also have control over the intangible rights related to process itself, typically intellectual property and other general intangibles. Most asset based lenders begin intercreditor negotiations with the assumption that general intangibles are working capital assets, which is an understandable but simplistic starting point. This result requires a fixed asset lender to evaluate and argue for the need for intellectual property to move with the fixed assets. Similarly, other general intangibles such as long term supply contracts to customers may be better viewed as fixed asset collateral even if the payment intangibles created under the contracts are not. In short, each category of collateral needs to be thoughtfully evaluated in light of the facts.14

14 Split lien structures are often used even where there is little in the way of fixed assets. The fixed asset lender is really looking to the , that inchoate value that exists as a result of the business’ ability to create cash flow. This results in a related need to address the allocation of proceeds of any joint sale of the collateral, the most common, albeit imperfect, formulation of which is an agreement to allocate book value to the working capital assets upon a sale of all of the assets. 12

Collateral Access. Another issue arising in a split lien structure is the need to

obtain access to, and the use of, the other lender’s priority collateral. A working capital

lender may need access to the fixed assets to recover its inventory or finish work in

process. That access may also require the use of intellectual property, discuss above, to

finish and liquidate the lender’s priority collateral.15 Like the issues raised with collateral

allocation above, a traditional second lien intercreditor agreement does not need to

contemplate this situation. It is imperative then for an attorney to consider the impact of

a third party’s potential control over a key asset when negotiating a split lien intercreditor

agreement. When structured properly, the intercreditor agreement will provide for mutual

access to each other lender’s priority collateral within certain timeframes and other

limitations.

Unitranche16 or First Out/Last Out Transactions

No discussion of financing structures in the middle market is complete without a look at the flavor of the day – unitranche financings. Unlike a second lien or split lien transaction, the documentation involves only a single credit agreement with a separate

Agreement Among Lenders (“AAL”) that serves as the intercreditor agreement. From the perspective of the borrower, it services a single credit facility with a single rate of interest17 with all of its debt amortizing at the same rate. In the AAL, the lenders in the

facility establish priorities to payment outside of the purview of the borrower. The

borrower may prefer this structure in that it effectively allows it to amortize its junior

15 In fact, this is the primary argument for the working capital lender to have a priority lien on general intangibles, but this concern can be addressed through cooperation agreements and limited licenses. 16 Some attorneys like to refer to this structure as “First Out/ Last Out” as the term “Unitranche” also is used to describe any facility with a blended rate even if offered by a single lender. 17 We consider here the most basic structure. It is possible to layer multiple differently priced tranches each with its AAL. 13 capital at the same rate as its senior capital, while paying an interest rate that reflects a blend of a traditional senior facility and junior facility. The effect of the structure is to lower the over the life of the loan.

The AAL is clearly an intercreditor agreement, but it differs from other intercreditor arrangements in that the borrower is often not a party to the agreement and, in rare cases, not even aware of the arrangement.18 From a structuring perspective, the first out lenders obtain a payment priority in the event that certain triggers occur: payment defaults, bankruptcy, acceleration and other negotiated items. In exchange for the priority, the first out lenders agree that the last out lenders will receive a portion of the interest contractually payable to the first out lenders, in effect giving a yield premium to the last out lenders in the form of an interest rate skim. The first out lenders require waivers in the AAL analogous to those raised earlier in our discussion of second lien financings as the underlying risk the AAL attempts to address is the same: in what way can the last out lenders use their position to unfairly demand a consent premium from the first out lenders.

A traditional second lien financing would include two separate credit agreements meaning that the first lien lender and the second lien lender would each have its own facility with covenants etc. that it administers subject to the intercreditor agreement.

With a single credit agreement, a unitranche financing has the added complexity of needing to alter the voting rights of the first out lenders and the last out lenders from the standards set forth in the credit agreement to give the first out lenders the ability (i) to

18 The fact the is not a party has caused some concern that a bankruptcy court might not assert jurisdiction over any dispute under an AAL. In a recent case, In re RadioShack Corp., No. 15-10197 (Bankr. D. Del.), the bankruptcy court did resolve a dispute under an AAL, but the parties to the dispute had consented to the court’s jurisdiction. 14 control exercises of remedies that might otherwise require the consent of some of the last out lenders, (ii) permit increases in the facility during a workout, and (iii) consent to the sale of assets in and out of bankruptcy. An attorney also might assume that when structuring a unitranche transaction, the goal is to recreate the priorities and rights in favor of the first out lenders that would otherwise be found in and second lien debt. While true in some cases, the market varies widely based on the relative size of the first out and last obligations and the collateral coverage of the first out lenders. Attached as an Appendix to this manuscript is a chart comparing three recent transactions which will give you some idea of the variability of intercreditor terms.19 As you can see from the comparisons, the larger the last out facility, the softer the subordination given the presumed overcollateralization of the first out exposure. That being said, it is helpful to note that the intercreditor agreements with respect to collateral issues cover the same issues highlighted earlier, with the results also targeted to mitigating the chance for the last out lender to demand consent premiums.

Other Financing Structures

As noted at the outset, trying to do justice to any topic that includes the phrase a

“wide range of financing structures” risks leaving a financing structure out that may be important to someone who, for whatever reason, actually elected to read this manuscript.

The good news is that the same principle, avoiding consent premiums, applies when looking at other intercreditor structures as well:

• Secured Subordinated Debt;

• Pari Passu Collateral Sharing;

19 See Appendix. 15

• Surety/Lender Intercreditor Agreements; and

• Super-Priority Revolving Credit Facilities.

In each case, the lenders who bear the risk of the consent premium may change, requiring

the junior party to negotiate for greater rights, or, where there is not a junior party, an

acceptance of the risk of gridlock in a distressed situation. The silver lining is that

bankruptcy courts have shown a willingness to view disputes regarding intercreditor

agreements as “core proceedings” given their impact on the distribution of the assets

under any plan and the plain language of §510(a) of the Bankruptcy Code.20 Perhaps,

this result should not be that surprising given the courts ultimate power to disregard

intercreditor agreements under §1129(b)(1).21

Conclusion? Do not assume that your intercreditor form is sufficient or tailored

to your transaction. Evaluate how a liquidation or workout would unfold, and then

consider what you would expect of your counterparty in those circumstances. Of course,

you may not obtain through negotiation every point that you identify, but it is better to

have knowingly conceded an issue than have never evaluated the risk. If you made it this

far, thanks!

20 See In re MPM Silicones, LLC, 2014 Bankr. LEXIS 3926, *3, 2014 WL 4436335 (Bankr. SDNY September 9, 2014)(finding jurisdiction over intercreditor disputes under sections 510(a), 502(b)(2), 506(b), 1129(a) and (b) of the Bankruptcy Code, pursuant to 28 U.S.C. sections 157(a)-(b) and 1334(b) as the intercreditor issues arise under the chapter 11 case and are related to the chapter 11 case)(appealed on other grounds); Del. Trust Co. v. Wilmington Trust, N.A., 534 B.R. 500, 515 (SDNY July 23, 2015) (because disputes over intercreditor agreements affect the allocation of money currently in the ' coffers, cash collateral adequate protection and plan distributions, the allocation of such money is itself a core bankruptcy function. See 28 U.S.C. § 157(b)(2)(A)(affirmed In re Energy Future Holdings Corp., 566 B.R. 669 (D. Del. March 11, 2016, appealed on other grounds) (the present dispute is therefore particular to and "uniquely affected by" this bankruptcy.).

21 See In re TCI 2 Holdings LLC, 428 B.R. 117 (Bankr. D. N.J. 2010)( holding that “” was permissible even where the terms of the plan violated an intercreditor agreement). 16

APPENDIX (Variability in Unitranche Terms)

Example A Example B Example C Loan Structure Majority First Out Majority Last Out 50/50 (approximately) Buy-out Rights First Out (holding None. None. (First Out) >50%) when: 1. First Out payment default; 2. Accel. or exercise of remedies (EoR); 3. Bankruptcy; 4. Last Out demand for EoR; 5. Waterfall trigger notice by First Out; or 6. Last Out fails to vote in favor of certain amendments.

Right of First First Out has ability to None. First Out (holding >10%) has Offer purchase Last Out ability to purchase Last Out (First Out) obligations before sale obligations before sale to third to third parties. parties.

Buy-out Rights Last Out (holding Any Last Out when: Any Last Out when: (Last Out) >50%) when: 1. Last Out payment 1. Last Out payment 1. Last Out payment default; default >$50k; default; 2. Accel. or EoR; 2. Accel. or EoR; 2. Accel. or EoR; 3. Bankruptcy; 3. Bankruptcy; 3. Bankruptcy; 4. First Out demand for 4. First Out demand for 4. First Out demand EoR; EoR; or for EoR; or 5. Waterfall trigger 5. Waterfall trigger notice 5. Waterfall trigger notice by First Out; by First Out; notice by First or 6. First Out fails to vote in Out. 6. First Out fails to vote favor of certain in favor of certain amendment; amendments. 7. First Out revolving lenders cease funding for 5 consecutive days; or 8. Admin Agent resignation.

Right of First Last Out has ability to Last Out has ability to Last Out (holding >10%) has Offer purchase First Out purchase First Out ability to purchase First Out (Last Out) obligations before sale obligations before sale to obligations before sale to third to third parties. third parties. parties.

Example A Example B Example C Loan Structure Majority First Out Majority Last Out 50/50 (approximately) Voting Structure / Class votes for all Prior to a voting rights Class votes for all issues. Rights issues. event, all votes are Last Out compelled to “Required Lender” votes vote in favor of certain except for certain amendments approved specific amendments by majority of First (i.e., veto rights) to Out. which First Out consent required (e.g. those relating to revolving facility mechanics and traditional sacred rights). After voting rights event, all votes are class votes. Voting rights event are (i) FCC < 1.05x or (ii) TTM EBITDA of < 5MM. Waterfall Triggering 1. Any payment 1. Payment default 1. Any payment default; Events default; >$25k; 2. Bankruptcy; 2. Financial 2. Bankruptcy. 3. EoR against collateral; covenant default 3. EoR against 4. First Out demand for EoR; in excess of collateral. 5. Financial covenant default agreed upon %; 4. Accel. (or First Out together with leverage test; or demand therefor). 6. Certain reps / warranties or 3. Bankruptcy. material defaults together with leverage test; or 7. Failure to deliver financials for 30 days. Exercise of Remedies First Out may demand First Out may demand First Out may demand EoR for (First Out) EoR for any default. EoR for: any default. 1. Payment default greater than $25k; 2. Bankruptcy; 3. FCC < 1.0x; or 4. Breach of anti- terrorism covenants. Exercise of Remedies Last Out may demand Last Out may demand Last Out may demand EoR for (Last Out) EoR for any default. EoR for any default. any default.

Example A Example B Example C Loan Structure Majority First Out Majority Last Out 50/50 (approximately) Remedy Standstills 30-day standstill from 30-day standstill from 30-day standstill from date of date of demand. date of default; carve- demand (non-payment default); 15 (First Out) out for cash dominion. business day standstill from date of Standstill also demand (payment default). applicable when buy- Standstill also applicable out or ROFO in when buy-out or ROFO Standstill also applicable when process. in process. buy-out in process. Remedy Standstills 90-day standstill from 90-day standstill from 90-day standstill from date of date of demand. date of default. demand. (Last Out) Bankruptcy Voting Neither First Out nor Last Out will may not Last Out may not propose plan that Last Out may accept accept plan that does not contravenes the waterfall plan that does not have have First Out approval provisions of the AAL without First other class’ approval absent First Out consent Out consent. by 2/3 in amount. or payment in full of First Out Last Out may not propose plan contrary Last Out may not to terms of AAL propose plan contrary to without First Out terms in AAL without consent. First Out consent. 363 Sale Rights Last Out deemed to Last Out deemed to Last Out deemed to consent if (i) consent if (i) agent's consent if (i) agent's lien agent's lien attaches to proceeds lien attaches to attaches to proceeds and and (ii) proceeds are applied in proceeds and (ii) (ii) proceeds are applied accordance with waterfall of AAL. proceeds are applied in in accordance with First Out deemed to consent if sale accordance with waterfall of AAL. will pay First Out obligations in waterfall of AAL. Increasingly subject to cash in full. Last Out may credit minimum hold First Out deemed to bid, but only if First Out paid in full requirements for First consent if sale will pay in cash at closing. Out. First Out obligations in Last Out may raise objections that cash in full. Last Out Last Out may credit bid, unsecured creditor could raise so may credit bid, but but only if First Out paid only if First Out paid in full in cash at closing. long as not inconsistent with in full in cash at agreement. Last Out may raise closing. objections that Last Out may raise unsecured creditor could objections that raise so long as not unsecured creditor inconsistent with could raise so long as agreement. not inconsistent with agreement.