OUTLINE FOR MAY ACREL PRESENTATION

Transcription

1 OUTLINE FOR MAY ACREL PRESENTATION Subject: Title Insurance Issues Created by Multi-State Pooling Including creditors rights issues in a complex facility with a revolver and term loans, collateralized by properties in a number of states with cross default and collateralization. Attachments: Term Sheet for Facility Article: Real Estate Title Problems Created by Cross Collateralization Article: Creditors' Rights Issues for Non-Specialists Endorsement: Fraudulent Transfer Endorsement: Aggregation Outline: : I. Multi-state issues. A. Transaction issues. 1. Single action rules. 2. Mortgage taxes. 3. What state law applies to issues other than the real estate security? B. Title insurance issues. 1. Aggregation of insurance (tie-in endorsements). 2. First loss endorsements. 3. Closing coordination. II. Cross collateralization issues. A. Authority issues. 1. Does the borrowing organization s charter or similar organic document permit it to become a guarantor of others obligations? 1

2 2. Can general partners create suretyship obligations for their partnerships. 3. Does impending disaster make any difference? [Wilf v. Halpern, NY Law Jour p.28, col.3.; Affd., 599 NYS 2d 579 (N.Y. App. 1993)] B. Methods 1. All participants execute a single note and secure performance with mortgages on each of their properties. 2. Each participant executes a separate note for its individual debt and a guarantee of the performance of the other participants in paying their own individual debts. All of the obligations are cross-defaulted. a. Full guarantee. b. Limited or proportional guarantee ( Net worth guarantee). 3. Individual debt and guarantee obligation are secured by a single mortgage. 4. The individual debt is secured by a first mortgage and the guarantee is secured by a second mortgage. 5. Contribution agreements. a. Do they do any good? b. How are they evaluated as assets? C. Creditors rights problems. 1. Solvency. a. Execution of a single note as in I.B.1. above. (1) Does this create insolvency of individual entities? (2) How do you evaluate rights of contribution among joint obligors? (a) Are written contribution agreements useful? 2

3 (b) How is the liability of the guarantee valued? [Matter of Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988)] b. Is the double mortgage procedure of I.B.4, above safer than a single mortgage securing the direct and guarantee obligations of I.B.3, above? (Equity jurisdiction of bankruptcy courts.) 2. Adequacy of capital to continue in business. a. Will a full guarantee preclude the entity from obtaining future credit if cash flow falters? b. Is a limited or proportional guarantee as in B.2.b. any better from this perspective? 3. Creditors rights law on future advances. a. Each is a separate transfer under the Bankruptcy Code. [Rubin v. Mfrs Hanover Trust Co., 661 F.2d 979 (2d Cir. 1881)] b. Is the guarantee a transfer only at the time it is given or with each future advance too? 4. Title insurance issues. a. Do prior versions of the ALTA policies which do not contain creditors rights exclusions cover the creditors rights risk? (1) Exclusions from coverage based on knowledge and acts of the insured. (2) Exclusion from coverage on post policy events. [CTIC v. Citizens and Southern Nat l Bank, 821 F.Supp 1492 (N.D. Ga. 1993)] b. What coverage is provided when the creditors rights exclusion is removed from a current ALTA policy? c. Affirmative insurance. d. Title insurance underwriting. 3

4 III. Bankruptcy-remote entity issues. A. Reasons for creation. B. Do they really work? [In re: Kingston Square Assoc., 214 BR 713 (Bankr. SDNY 1997).] C. Substantive consolidation in bankruptcy. IV. Judicial Recharacterization. A. Elements considered by courts. B. Tax recharacterization v. true recharacterization. 4

5 FunClubs International Acquisition Credit Facilities Borrower: Tranche 1 1 Term Loan: FCI International Ltd., parent of FunClubs Group, for Tranche 1; parent and subsidiaries for Tranche 2. $200 million 10 year, fixed rate, amortizing on 30 year schedule. Mandatory debt service reserve and additional collateral if DCR (Debt Coverage Ratio) falls below 1.4. LTV 50%. To be secured by first mortgages on all properties owned by wholly owned subsidiaries of group. Collateralized and cross defaulted for full $200 million with right to collect from any group of properties in any order, including any breakage or yield maintenance due on prepayment of facility, whether or not permitted. To be used to replace existing debt on properties. Tranche 2 Term Loan: $150 million 5 year, floating rate debt without amortization. Hyperamortization 2 on maturity or if DCR falls below 1.15 after debt service on Tranche 1. Can prepay for 1% of principal. 1 "Tranche", from the French trancher or trenchier, meaning to cut, is a term used in the debt markets to indicate a series of notes or bonds within a larger credit facility and having special characteristics of maturity, interest rate, repayment terms, priority, security, etc. 2 "Hyperamortization" is accelerated amortization required in the event of deterioration of the loan quality or a failure to repay on maturity. It may take the form of a mandatory paydown from other funds or a cash sweep of funds otherwise distributable from the project or business. Hyperamortization provides a lender with some of the benefits of a lockbox or a receivership of rents or revenues without the necessity of a legal proceeding. For that reason, hyperamortization is sometimes described as a built-in workout. 5

6 Borrower required to buy a swap contract (that is, a cap) against interest rate fluctuations. To be used to (a) replace acquisition debt until extra assets are sold off and debt is paid down with proceeds and (b) pay for renovations expected to turn around underperforming properties within 5 years. Can be used to make distributions to parent if DCR is above 1.25 after payment of Tranche 1. To be secured by second mortgage from the named borrower on its properties owned. Cross collateralized by a third mortgage and cross defaulted for full $150 million plus any breakage or yield maintenance due on prepayment of facility, whether or not permitted. Tranche 3 Revolver: $150 million 2 year, floating rate without amortization. To be used for loans to new subsidiaries for new acquisitions until replaced by equity. To be secured by a first lien on any newly acquired property and by a fourth mortgage for excess value of collateral over that required for Tranches 1 and 2. All Tranches: Separately syndicated with same agent or lead lender, different participants. Subsidiaries will enter into Contribution Agreements with parent so that parent will indemnify them against losses in the event of a foreclosure on collateral. Parent will guarantee to pay all trade creditors and unsecured claims against subsidiaries in the event of an alleged insolvency of the subsidiary. Property Collateral: All real and personal property, fixed and percentage rents, concession income and operating revenues from a pool of mixed use properties including theaters, restaurants under operating agreements, leased retail and themed amusement facilities in California, Florida, Georgia, Illinois, New York and Texas. 6

7 Reserves for debt service, capital replacement, taxes to be pledged as collateral. Marketing agreements, trademarks and other intellectual property to be pledged as collateral. Each operating property to be owned by separate SPV (Special Purpose Vehicle) wholly owned by FunClub International Ltd. and giving a full guarantee of its parent company's obligations to Lender. Share Pledges: Lender Approval Rights: Security interest in all shares of subsidiaries. Aggregate value of pool of collateral must be acceptable to lender. Lender to approve all new acquisitions, all distributions of dividends, all material contracts and leases, and annual capital budgets. Lender Kicker Payment: Lender gets 10% of net income of Group after $100 Million. Lender gets 5% of gross proceeds after repayment of debt if all or a material part of the Group is sold within 7 years. Lender Option: Lender will have the right to match any future refinancing offer. 7

8 ENDORSEMENT Attached to and forming a part of Loan Policy No. Issued by CHICAGO TITLE INSURANCE COMPANY Notwithstanding sections 3(a), 3(d) and 7 of the Exclusions from Coverage, the Company insures the insured against loss or damage the insured shall sustain by reason of the voidability, in whole or in part, of the insured mortgage or the title to the estate or interest shown on Schedule A because of the occurrence on or before Date of Policy of a Fraudulent Transfer or a preference, in either case under federal bankruptcy, state insolvency or similar creditors' rights laws. The coverage provided by this endorsement shall include the payment of costs, attorneys fees and expenses necessary to defend the insured against those counts of any litigation seeking court orders which will result in loss or damage against which this endorsement provides insurance, and no others, to the extent provided in the Conditions and Stipulations which is not inconsistent with this paragraph. As used in this endorsement, the phrase "Fraudulent Transfer" means a fraudulent transfer or conveyance other than one which the insured, at the time it acquired the insured mortgage, knew was actually intended to hinder, delay or defraud any creditor. This endorsement is made a part of the policy and is subject to all the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and prior endorsements, if any, nor does it extend the effective date of the policy and prior endorsements or increase the face amount thereof. Dated: Authorized Signatory

9 ENDORSEMENT Attached to Policy No. Issued By CHICAGO TITLE INSURANCE COMPANY The following policies are issued in conjunction with one another: POLICY NUMBER: COUNTY: STATE: AMOUNT: Notwithstanding the provisions of Section 7(a)(i) of the Conditions and Stipulations of this policy, the amount of insurance available to cover the Company's liability for loss or damage under this policy at the time of Payment of Loss hereunder shall be the aggregate of the amount of insurance under this policy and the other policies identified above. At no time shall the amount of insurance under this policy and the other policies identified above exceed in the aggregate $. Subject to the provisions of Section 9(a) of the Conditions and Stipulations of the policies, all payments made by the Company under this policy or any of the other policies identified above, except the payments made for costs, attorney's fees and expenses, shall reduce the aggregate amount of insurance pro tanto. This endorsement is made a part of the policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements. CHICAGO TITLE INSURANCE COMPANY BY: (Authorized Signatory)