INTERCREDITOR/ SUBORDINATION AGREEMENTS. R. Marshall Grodner McGlinchey Stafford

Transcription

1 INTERCREDITOR/ SUBORDINATION AGREEMENTS R. Marshall Grodner McGlinchey Stafford

2 INTRODUCTION Types of Subordination Types of Lien Subordination Players General Definition Issues General Drafting Issues What Senior Secured Party Wants What Subordinated Creditor Wants Some Solutions Miscellaneous

3 INTERCREDITOR AND SUBORDINATION What is an Intercreditor Agreement? What is a Subordination Agreement? Authorized by 510(a) of the Bankruptcy Code

4 TYPES OF SUBORDINATION Debt For Lawyers An accounting issue Two Kinds ab initio subsequent Two Types Complete No payment until Senior paid in full Contingent Junior has right to payment until Event of Default

5 TYPES OF SUBORDINATION Lien Expressly provided in Do you want to file a UCC-3 Statement of Amendment?

6 PLAYERS Fixed Asset Lenders and ABL Lenders Standard Senior Secured Lenders and Debt/Equity Lenders Old style mezzanine structures Senior Secured Lender and Junior Secured Lenders The new Hedge Fund paradigm

7 TYPES OF LIEN SUBORDINATION Complete Subordination What s mine is mine and yours is yours Shared Collateral

8 GENERAL DEFINITION ISSUES Senior/Subordinated Obligations Broad Any and All Limited Current Deal Premiums and Fees Undersecured Senior in may be able to get post petition in Debtor s Bankruptcy Applies to refinancing or not Maximum Amount of Obligations As may be modified or amended Limits on rights to modify Extend principal payments Lower interest rates

9 GENERAL DEFINITION ISSUES Enforcement Action Demand for Payment Acceleration Take Possession/Collect Foreclosure Enforce other rights and remedies Filing a proof of claim?

10 GENERAL DEFINITION ISSUES Collateral Fixed Asset v. ABL Equipment and Real Estate Inventory, Accounts, Payment Intangibles and other rights to payment What about General Intangibles? Related to Equipment/RE Related to Inventory Inventory v. Account Lenders

11 COLLATERAL Fixed Asset v. ABL What About Proceeds? Cash Non-cash Right to a Junior Lien? Shared Collateral All typical in complete subordination Some? Equipment v. Fixtures

12 GENERAL DRAFTING ISSUES Provide copies of Loan Documents Right to Amend. Perfection or Non-perfection Timing of perfection immaterial What if one party is not perfected Does it or should it matter?

13 GENERAL DRAFTING ISSUES One party s collateral (or proceeds) in the possession of the other Bailee language Notice of Default to Other Party Failure to give notice does not affect right to take Enforcement Action

14 General Drafting Issues Priority on Disbursements First to Fees, Costs, Obligations of Senior Up to Maximum Amount Next to Fees, Costs, Obligations of Junior Up to Maximum Amount Remainder to Senior until paid in full Remainder to Junior until paid in full Then, to others according to law

15 Senior Creditor s Desires No rights to Junior No payments of principal and/or interest until Senior paid in full Junior has no right to commence Enforcement Action Junior Consents to release of lien upon any Enforcement Action or other disposition consented to by Senior Right to file Proof of Claim on Junior

16 Senior Creditor s Desires Junior cannot challenge the creation, attachment, perfection, continuation or priority of Senior s liens Limits on commercial reasonableness challenge No modification of Sub-Debt documents without Senior s Consent Junior has no right to participate in involuntary bankruptcy

17 Junior Creditor s Desires Right to regularly scheduled payments of principal and interest Right to Enforcement Action if Senior refuses to do anything Right to share in proceeds of major asset sales Right to modify Loan Documents freely if does not affect Senior Lender Right to challenge perfection of Senior liens

18 Some Solutions Junior s Right to payment Right to payments (principal and/or interest) prior to Event of Default under Senior Include payment would cause an Event of Default? Must it be a material default?

19 Some Solutions Right to Blocking Notice from Senior Effective for set time Payment Defaults Non-Monetary Financial Covenants Non-Financial Covenants Revocation Reissue for New Event of Default Number limit for Non-monetary within certain time Make Whole Payments

20 Some Solutions Junior s Right to take Enforcement Action Right of Junior to send Standstill Notice that Sub Debt in Default Cure Within days of notice, Junior can take Enforcement Action if Senior has not commenced Period Tolls if: Bankruptcy of Debtor until Lift Stay granted Limits on Senior s ability to foreclose Right of Senior to cure Upon cure, Junior must issue new Standstill Notice

21 Some Solutions Major Sales Outside the Ordinary Course Definition Right of Junior to get some percentage as mandatory pre-payment Consent of Junior to release upon payment or any other non-major sales/enforcement actions Right to Contest Perfection of Senior Liens

22 Some Solutions Modification of Junior Loan Documents General amendments that do not affect rights of Senior Extensions of Time to Pay Decreases in Interest Rate Releases of Liens

23 Miscellaneous Drafting Issues Assignability Senior Debt Junior Debt Consent of Senior Must be expressly subject to subordination

24 Miscellaneous Drafting Issues Assignment of Proceeds/Double Dividends Senior receives all payments (including Junior) until paid in full, then Junior receives Need to expressly provide for post-petition interest Is it a security interest/perfection issue Is equitable subordination, and may be implied Include right of Senior to act on behalf of Junior in bankruptcy Right to file proof of claim Right to vote

25 Miscellaneous Drafting Issues Provision against Junior from forgiving or converting debt Preserves Senior s double dividend Junior can t get around payment block by converting No prepayment of Junior Debt Third Party Beneficiaries Only for Lenders Should Borrower acknowledge? Waiver of right to marshalling

26 Miscellaneous Drafting Issues Termination Senior Debt paid in full Termination on notice Must have prospective effect only for Senior Lender

27 Miscellaneous Drafting Issues Waivers Can a Junior lienholder waive rights under pre-default? only applies to debtors and obligors Similar to Guaranty Notice, demand, protest, etc. Acts or omissions of Senior Release or impairment of security Rights under 9-207, or 9-627

28 Miscellaneous Drafting Issues What s not commercially unreasonable - Standards Failure to incur expenses for preparation or complete wip Failure to obtain third party consents for access or collection Failure collection remedies or remove liens Use of collection agencies

29 Miscellaneous Drafting Issues Standards Hire professionals Sell on Internet Wholesale sales

30 Miscellaneous Drafting Issues Legends on Junior Debt instruments No HIDC status Pledge of Junior Debt instruments to secure double dividend Cross Defaults Junior v. Senior Subordination Agreement v. Loan Agreement

31 Miscellaneous Drafting Issues Reps, Warranties and covenants of Junior Unpaid balance amount Junior sole owner No assignment No other subordination No other evidence of Indebtedness No other collateral No defenses by Borrower Periodic Statements of Account by Junior

32 Other Issues Circularity Order of filing SP1, SP2, SP3 Subordination by SP1 to SP3 What s the ranking?

33 CONCLUSION R. Marshall Grodner McGlinchey Stafford