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Intercreditor Agreements in Second Lien Financing Transactions

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Intercreditor Agreements in Second Lien Financing Transactions Intercreditor Agreements in Second Lien Financing Transactions presents Negotiating and Drafting Agreements to Minimize Lienholder Disputes A Live 90-Minute Audio Conference with Interactive Q&A Today's panel features: Mark B. Joachim, Partner, Bracewell Giuliani, New York Michael D. Schiffer, Partner, Venable, Baltimore Tuesday, September 1, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10 Intercreditor Agreements in Second Lien Financing Transactions: Negotiating and Drafting Agreements to Minimize Lienholder Disputes Trends in Second Lien Financing and Enforceability of Intercreditor Agreements September 1, 2009 Mark B. Joachim, Bracewell & Giuliani LLP 1 Biography Mark Joachim Experience Mark Joachim is a Partner in the New York office of Bracewell & Giuliani LLP. Mark regularly advises a variety of financial institutions, including asset-based lenders, investment banks, commercial banks, funds, buy-out firms, and other parties in structuring and implementing complex corporate and financing transactions. In addition, he has extensive experience representing lenders (as well as creditors), official and unofficial committees of creditors, and debtors in connection with bankruptcy cases and out-of-court restructurings. His multifaceted experience also includes complex "pre-packaged" and pre-negotiated reorganizations, the purchase and sale of distressed businesses, and the financing of such transactions. Representative Matters D.E. Shaw Laminar Portfolios, LLC, Wells Fargo Foothill, Inc., Goldman Sachs Credit Partners L.P., SAC Capital Advisors, LLC, Credit Suisse First Boston, Bank of America, N.A., The CIT Group, Inc., Silver Point Finance, LLC and other financial institutions in numerous financing transactions. A major bondholder and DIP lender in the Spectrum Brands cases The senior secured lenders in the successful out-of-court restructuring of American Media The exit lenders to Safety-Kleen Systems, Inc. The DIP lenders to NorthWestern Corporation Wells Fargo Bank, N.A. in connection with the Key3 Media Group chapter 11 cases (continued on next page) 2 Biography Mark Joachim Representative Matters (Cont'd) The debtors in the Phar Mor chapter 11 cases The official committee of unsecured creditors of Harvard Industries, Inc. The official committee of unsecured creditors of International Wireless Communications The unofficial committee of Sun Healthcare's bondholders The unofficial committee of Sam Houston Race Park's bondholders The DIP lenders to Brothers Gourmet Coffees, Inc. The DIP lenders to Wilcox & Gibbs, Inc. Education – J.D., with distinction, Hofstra University School of Law, 1992 – B.A., State University of New York at Stony Brook, 1989 Bar Admissions –New York – California – Massachusetts 3 Trends in Second Lien Financing and Enforceability of Intercreditor Agreements Discussion Outline I. Introduction A. 2nd Lien Loans: The "Basics" B. 2nd Lien Loans: Basic "Benefits" C. Comparable Products That Are Not Our Focus D. Intercreditor Agreements: What We Will Be Discussing II. Evolution of Market for 2nd Lien Term Loans A. Early Stages B. Early 2000's C. Current Market D. Current Product III. Current Trends in 2nd Lien Financings A. Separate Credit Agreements, Financial & Negative Covenants and EODs B. Standstills on Exercise of Remedies C. 2nd Lien Enforcement Rights other than Against Collateral D. Cap on Senior Indebtedness E. 2nd Lien Buyout Rights F. Amendment Rights 4 Trends in Second Lien Financing and Enforceability of Intercreditor Agreements Discussion Outline IV. Pre-Agreement to Give Up Bankruptcy Rights in Intercreditor Agreements A. DIP Financing B. 363 Asset Sales C. Voting on a Plan of Reorganization D. Pre-Agreement to Give Up Bankruptcy Rights May Not be Enforceable V. The Future 5 I. Introduction 6 I. Introduction A. 2nd Lien Loans: The "Basics" of the Type of Loan We Will Be Focusing On: – Generally common arranger for first and second lien credit facilities – Syndicated or "Club" Deal – Often cash flow financings – Lien subordinated – not debt or payment subordinated – Usually no amortization – Pricing: LIBOR plus margin – typically no pricing grid – Modest prepayment premiums 7 I. Introduction B. 2nd Lien Loans – Basic "Benefits" For The Borrower: – Usually No warrants or equity Kickers – Competitively Priced – Flexibility »Most 2nd lien loans allow borrower to pre-pay all or part at any time with a relatively nominal fee (often 3/2/1) – Can have increased certainty of execution » "Club" Deals are privately placed and negotiated » No reliance on Flex pricing – Self-selected investors have higher risk tolerance than 1st Lien Lenders 8 I. Introduction C. Comparable Products That Are Not Our Focus: – Secured high yield bonds – tend to have weaker intercreditor agreements – Secured mezzanine financings – tend to receive equity "Kickers" – Pure ABL second lien loans - not as risky because not based on Cash Flow, so attract different type of lender 9 I. Introduction D. 2nd Lien Financings and Intercreditor Agreements: What We Will Be Discussing –1st & 2nd Liens – "Theoretically" pre-Agreeing To Avoid Confrontation Later – Pre-Bankruptcy Provisions: Current Trends On Where The Lines Have Been Drawn – Bankruptcy Provisions: Do they hold up? 10 II. Evolution of Market For Second Lien Term Loans 11 II. Evolution of Market For Second Lien Term Loans A. Early Stages: – Mid/Late 1990's: Only a handful of firms provided 2nd Lien Loans – Initial Uses: Restructurings & Turnarounds – Used where borrower tapped out senior bank facilities, but not able to access equity, mezzanine, or public bonds 12 II. Evolution of Market For Second Lien Term Loans B. Early 2000's: – Senior Lenders tightened lending standards – Junior lenders willing to grant credit in exchange for 2nd Lien, along with an intercreditor agreement with meaningful rights (short standstill, no pre- agreement as to bankruptcy) – Senior Lenders okay with granting 2nd Lien- it provided additional capital, 1st lien lender received fees, etc. – Initially, Borrowers gave 2nd Lien Loans on "Club" deal basis to preferred 2nd Lien Lenders –2nd Lien Lenders: Provided favorable risk/return, when other avenues not open to Borrower 13 II. Evolution of Market For Second Lien Term Loans C. Current Market: –2nd Lien financings used for every type of situation: acquisition growth, dividends, turnarounds, and restructurings – Lines between mezzanine and 2nd Lien debt have begun to blur, but certain differences, such as (x) covenant structure and (y) equity components remain – Underwriting runs gamut from tangible asset value to going concern value (with mixes in between) – Structuring, Syndication, and a general market place for 2nd Lien Loans have developed – Many Holders may hold both 1st and 2nd Liens (may be looking to maximize total recovery and also facilitates movement of information and transparency as to motives and strategy) 14 II. Evolution of Market For Second Lien Term Loans D. Current Product: – Non-Dilutive (usually no equity) – Prepayment Fee—usually first few years – Flexibility (e.g. no amortization) – May be preferred to doing subordinated debt (size, flexibility, etc.) but does bring another layer of complexity (intercreditor agreement) and secured lender group negotiations 15 III. Current Trends in 2nd Lien Financings 16 III. Current Trends in 2nd Lien Financings A. Separate Credit Agreements, Financial & Negative Covenants and EODs: –Gives 2nd Lien Lenders separate class vote on waivers & amendments – Contrast with single credit agreement, where 2nd Lien Lenders vote with 1st Lien Lenders and can get (a) out-voted or (b) "yanked" – Generally, 2nd Lien financial covenants and negative covenant baskets are cushioned off of 1st Lien numbers – Even though 2nd Lien Lender may be subject to standstill, gives 2nd Lien Lenders separate seat at table during restructuring when might have separate agenda – Overall effect is that it is more costly and time consuming to document, but intercreditor discussions are brought to the fore at the outset 17 III. Current Trends in 2nd Lien Financings B. Standstill on Exercise of Remedies: –1st Lien Lender obviously wants more time to react without 2nd Lien Lender at table –2nd Lien Lenders would like to be at table in time to preserve value and to be part of "action" plan – Standstill periods generally expire after 90 to 180 days. Many times the period varies based on whether it’s a tangible asset underwriting or an enterprise value underwriting – Issues: (a) Language may permit 2nd Liens to go forward if 1st Lien holders are not aggressively pursuing remedies; (b) 2nd Lien Lenders may seek to block 1st Lien Lenders from exercising remedies if and when 2nd Lien Lenders commence enforcement 18 III. Current Trends in 2nd Lien Financings C. 2nd Lien Enforcement Rights other than Against Collateral: – Standstill period generally only applies to Collateral; not restricted in exercise of remedies other than against
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