LEVERAGED FINANCE QUARTERLY Most first out facilities include simple turnover provisions with respect to proceeds First out or super received in contravention of the waterfall provision, while others include highly negotiated and bespoke intercreditor terms. Super seniors do not benefit from seniors – same subordination provisions, although they do benefit from turnover provisions which capture certain recoveries, typically with respect to collateral. difference? First out facilities should recover in priority to other senior secured debt in Chapter 11 The similarities and distinctions between typical proceedings. Super seniors, on the other hand, would not automatically take priority features of first out revolving credit facilities in the US, over other pari passu debt in a bankruptcy and super senior revolving credit facilities in Europe process in Europe. Instead, they are structured on the premise that in a default What is it? A standard super senior or first out scenario there will be an enforcement of a Labelled ‘first out’ in the US and ‘super waterfall provision provides that: single share pledge which captures the entire senior’ in Europe, this is a revolving credit • the obligations under the super senior or value of the group as a going concern, and facility (RCF) which has priority over other first out facility have top payment priority thereby enables a lender-driven financial pre- pari passu debt in relation to the proceeds of (except for payment of certain pack outside of formal bankruptcy enforcement of collateral and, in the US, enforcement-related and other amounts proceedings. guarantee recoveries. owing to agents of the pari passu creditors First out facilities in the US are relatively in their capacities as such); and, Control over enforcement uncommon and appear most often in middle- • following payment in full of the super A key issue for structures involving first out market financings and restructurings. The senior or first out obligations (and the and super senior facilities is who controls terms of first out facilities are often deal enforcement-related and agent enforcement actions. A balance must be specific. By contrast, super seniors are a well obligations, if any), any remaining struck between the interests of a relatively known component of a leveraged capital proceeds are allocated to the other pari small and well-insulated first out/super structure in the European market, and the passu obligations. priority class of revolving lenders, and the terms are more settled. Depending on the context, a first out interests of the larger and more exposed class facility may be documented in the same or a of term loan lenders or bond investors. How does it work? separate facility agreement, whereas super Super seniors typically appear beside pari seniors typically appear in their own First out position – US passu senior secured bonds. First out facilities, standalone agreement. Waterfall priority and First out facilities have generally provided that on the other hand, commonly co-exist with associated provisions are documented either enforcement actions, whether pre-bankruptcy pari passu term loans and/or pari passu senior in an intercreditor agreement (in bank/bond or during an insolvency or bankruptcy secured bonds. structures, and where the first out/super proceeding, are controlled by lenders holding The primary feature of super senior or first senior is documented in a separate a majority of all senior secured obligations out facilities across both markets is waterfall agreement) or a combined facility agreement. (that is, not the first out obligations). priority. That is, priority with respect to the Importantly (especially for a US However, as evidenced by certain recent application of proceeds of collateral following bankruptcy analysis), first out/super senior US transactions, this default position in an enforcement of collateral and, in the US, facilities do not have their own first priority favour of the larger senior secured creditors guarantee recoveries. The super senior or first lien, which a first lien lender would have in a has been increasingly circumscribed. First out tranche is paid from the enforcement first/second lien structure. Instead, all pari out lenders are becoming more focused on proceeds (including, in the case of first out passu creditors share the same grant of limiting dilatory enforcement by the term facilities, enforcement recoveries in a Chapter collateral (and guarantees) with the result that loan lenders or bond investors holding a 11 bankruptcy process) before other pari in Chapter 11 proceedings first outs would majority of all senior secured obligations. passu debt tranches that are secured by the typically vote in the same class as the senior A few first out transactions in recent years same collateral. secured lenders. have even flipped the traditional priority of creditors by providing the first out revolving tranche with exclusive control of enforcement Leveraged finance quarterly actions, while the holders of term loans or In this quarterly feature, Milbank’s leveraged Contributions from partners on both sides of bonds were left in the more junior position of finance group distil, compare and contrast the Atlantic will look at loans and bonds, with having to accept a more passive role. key features of the US and European large-cap or big sponsor-backed LBO A compromise is to include a short leveraged finance markets. documentation in mind. enforcement standstill period (for example, It will shine a light on the legal blindspots that The next contribution, which will focus on 90 to 120 days) following the expiration of have arisen as markets and products intercreditor agreements, will appear in the which, if the term debt holders are not converge, and as companies increasingly look December/January edition of IFLR magazine. exercising remedies, the first out revolving to structure transatlantic deals. lenders are able to step into direct remedial action. 22 IFLR/September 2013 www.iflr.com LEVERAGED FINANCE QUARTERLY Further, first out structures have begun super senior lenders or majority senior If, however, either this minimum period incorporating increasingly fulsome secured bondholders may initiate has elapsed and the senior secured intercreditor provisions. Additional enforcement by notice to the security agent. bondholders have taken no enforcement protections include: Following this, the super senior lenders and action , or, at the end of this period, the (a) prohibitions on additional liens in senior secured bondholders are required to super senior liabilities have not been repaid favour of other creditor groups and consult with each other as to the manner of in full, then the super senior lenders can incurring other pari passu debt above a enforcement for a specified consultation seize control of enforcement by notice to certain threshold; and, period. This is the case, unless certain the security agent. In this situation, the (b) requirements to: circumstances apply. For example, if an security agent would, going forward, be i. (as far as reasonably practicable) insolvency event has occurred or the obliged to act in accordance with notify the non-enforcing creditors of creditors’ representative(s) who initiated instructions as to enforcement from the enforcement of shared collateral; enforcement reasonably believes that no majority super senior lenders. ii. consult in good faith with the non- consultation period or a shorter In all cases, the enforcement instructions enforcing creditors prior to and consultation period is necessary to avoid must comply with the enforcement during such enforcement action; materially impairing the ability to effect principles. Such principles will typically and, enforcement, or the value which would be provide that the proceeds of enforcement iii. act and otherwise co-operate with realised on enforcement. must be in cash and sufficient to cover the the non-enforcing creditors in a After the consultation period, in the super senior liabilities being repaid in full, commercially reasonable manner in event the security agent receives conflicting and that the sale price must be supported by any enforcement of shared collateral. instructions as to enforcement from the a fairness opinion. super senior lenders and the senior secured The table below summarises the key Super senior position – Europe bondholders, the majority senior secured documentary differences between first outs The European position on enforcement bondholders would typically be the and super seniors. rights differs from that of the US in certain controlling party for a certain period (for By Milbank partners Suhrud Mehta in respects. Generally, either the majority example, three to six months). London and Lauren Hanrahan in New York Feature US – first out Europe – super senior Waterfall priority ✓ ✓ (collateral and guarantees) (typically only collateral) Equal ranking ✓ ✓ Documentation Most commonly documented as a separate Separate revolving facility agreement with own revolving tranche under the facility agreement covenants and default triggers, and consistent as the pari passu term debt. However, if the with terms of senior secured bonds (but usually other pari passu debt consists of notes, the first goes further by incorporating a maintenance out facility will be documented in its own facility financial covenant, additional information under- agreement. takings, and events of default). Mandatory prepayments As is customary for US-style revolving