Drafting Standstills in Intercreditor Agreements: Junior Lienholder Standstill Periods and Secured Creditor Remedies

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Drafting Standstills in Intercreditor Agreements: Junior Lienholder Standstill Periods and Secured Creditor Remedies Negotiating Duration, Commencement, Expiration, Notice to First-Lien Lender, Reinstatement of Standstill Period Provisions and More MONDAY, NOVEMBER 14, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Katherine E. Bell, Partner, Paul Hastings, Costa Mesa, Calif. Peter S. Burke, Partner, Paul Hastings, Los Angeles Jennifer B. Hildebrandt, Partner, Corporate Department, Paul Hastings, Los Angeles Jennifer St. John Yount, Partner, Chair of Finance and Restructuring, Paul Hastings, Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 DRAFTING STANDSTILLS: JUNIOR CREDITOR STANDSTILL PERIODS AND REMEDIES November 14, 2016

6 AGENDA I. Introduction A. Types of Intercreditor Agreements B. Subordination Agreements C. Lien Subordination vs. Payment Subordination D. Parties to Intercreditor Agreements and Subordination Agreements 6 II. III. Concepts and Mechanics of the Standstill Period in Intercreditor Agreements Payment Blockage Periods and Claim Standstills in Subordination Agreements IV. Commonly Negotiated Issues Related to Standstill Periods and Payment Blockage Periods A. Triggering Event For the Standstill Period B. Length of Standstill Period C. Continuation of the Standstill Period D. Resetting the Standstill Period E. Scope of the Standstill F. Turnover Provisions G. Triggering Event for and Length of Payment Blockage H. Scope of Payment Blockage

7 I. INTRODUCTION 7

8 I. INTRODUCTION 8 A. Types of Intercreditor Agreements B. Subordination Agreements C. Lien Subordination vs. Payment Subordination D. Parties to Intercreditor Agreements

9 A. TYPES OF INTERCREDITOR AGREEMENTS 9 1. First Lien/Second Lien Intercreditor Agreement The same priorities of the lien subordination apply to all of the collateral. Typically each agent has a lien on substantially all of the collateral, with the working capital agent having a senior lien on substantially all of the collateral and the term loan agent having a junior lien on substantially all of the collateral. 2. Split Collateral Intercreditor Agreement The collateral is bifurcated with differing priorities applying to different portions of the collateral. Typically the two categories of collateral are the working capital priority collateral (accounts, inventory, other receivables deposit accounts and other related assets) and the term loan priority collateral (intellectual property, equipment, equity interests issued by the loan parties, intercompany loans, and other assets that are not working capital priority collateral). Typically the working capital agent has a senior lien on the working capital priority collateral and a junior lien on the term loan priority collateral and the term loan agent has a senior lien on the term loan priority collateral and a junior lien on the working capital priority collateral. Each agent is treated as a senior agent with respect to a portion of the collateral and a junior agent with respect to other portions of the collateral.

10 B. SUBORDINATION AGREEMENTS 10 Agreement which contractually subordinates payment obligations under the junior credit facility to payment obligations under the senior credit facility. The Subordination agreement also include a subordination of all remedies under the junior loan documents, including unsecured creditor remedies, to the remedies under the senior loan documents. Sometimes the junior credit facility is secured by a lien on the collateral. When the obligations evidenced by the junior credit facility are secured by a lien on the collateral, the subordination agreement will subordinate the liens securing such obligations to the liens securing the obligations evidencing the senior credit facility. When the obligations evidenced by the junior credit facility are secured by a lien on the collateral the structure of the lien subordination provision will be a first lien/second lien and not a split collateral arrangement. The subordination agreement governs the rights and obligations of each group of lenders in relation to the other group of lenders.

11 C. LIEN SUBORDINATION VS. PAYMENT SUBORDINATION 11 Lien Subordination: What is it? Second lien lenders agree that (i) their lien on shared collateral is junior to the lien of the first lien lenders on such shared collateral; and (ii) the lien of the first lien lenders on shared collateral is senior to the lien of the second lien lenders on such shared collateral. When does lien subordination become payment subordination? Absolute priority rule vs. relative priority rule In re Ion Media Networks, Inc., 419 B.R. 585 (Bankr. S.D.N.Y. 2009) Disallowed post-petition interest Turnover provisions Restrictions on voluntary and/or mandatory prepayments to the second lien lenders and payment blockages 11

12 C. LIEN SUBORDINATION VS. PAYMENT SUBORDINATION 12 Payment Subordination: Junior lenders agree that (i) the debt owing to the junior lenders is subordinated to the debt owing to the senior lenders, and (ii) the debt owing to the senior lenders has priority over the debt owing to the junior lenders. The terms subordination and priority in a contract are not self-defining and imply little about the relationship between the senior lenders and the junior lenders. The Subordination Agreement must set forth with specificity the terms of the subordination. These terms include restrictions on the right of the junior lenders to retain payment in respect of the junior debt under certain circumstances, limitations on the remedies that may be exercised by the junior lenders and application of the waterfall to all payments or distributions received by the junior lenders. Typically the junior lenders are unsecured, but occasionally they may hold a second lien. Junior lien debt is structured to be equivalent, from perspective of holders of senior debt, to unsecured junior debt. Such subordination of secured debt typically includes both lien subordination and lien enforcement standstill provisions.

13 D. PARTIES TO INTERCREDITOR AGREEMENTS AND SUBORDINATION AGREEMENTS 13 As noted above, depending on the type of intercreditor agreement, the working capital agent may either be the senior agent with respect to all of the collateral or may be the senior agent with respect to the working capital priority collateral and the junior agent with respect to the term loan priority collateral. Similarly, the term loan agent may be the junior agent with respect to all of the collateral, or may be the senior agent with respect to all of the collateral or may be the senior agent with respect to the term loan priority collateral and the junior agent with respect to the working capital priority collateral. Given that we will be speaking about both types of intercreditor agreements and subordination agreements during this presentation, we will use the term senior agent to refer to (a) the working capital agent with respect to all of the collateral in connection with a first lien/second lien intercreditor agreement, (b) the working capital agent with respect to the working capital priority collateral and the term loan agent with respect to the term loan priority collateral in connection with a split collateral intercreditor agreement, or (c) the senior agent in the subordination agreement. Similarly, we will use the term junior agent to refer to (a) the term loan agent with respect to all of the collateral in connection with a first lien/second lien intercreditor agreement, (b) the term loan agent with respect to the working capital priority collateral and the working capital agent with respect to the term loan priority collateral in connection with a split collateral intercreditor agreement, or (c) the junior agent in the subordination agreement.

14 II. CONCEPTS AND MECHANICS OF THE STANDSTILL PERIOD IN INTERCREDITOR AGREEMENTS 14

15 COMMENCEMENT AND CONTINUATION OF THE STANDSTILL PERIOD 15 In general the standstill period is the period during which the junior agent cannot exercise remedies with respect to the collateral. Typically, the applicable time period starts upon the delivery of a written notice by the junior agent to the senior agent of the occurrence and continuance of the applicable triggering event that is specified in the intercreditor agreement. In some intercreditor agreements the standstill period does not start until the delivery of the standstill notice by the senior agent to the junior agent. There would also be a prohibition on the junior agent exercising remedies until the junior agent has provided at least 10 days prior written notice of its intent to exercise remedies against the collateral. It is more common, however, for the standstill period to commence upon the execution of the intercreditor agreement and to continue until the expiration of the applicable time period. The typical formulation is that the standstill period continues until passage of the applicable time period following the later to occur of the delivery of the standstill notice by the junior agent and the occurrence of the applicable triggering event. This standstill period can be extended by the senior agent by exercising secured creditor remedies. This is consistent with the concept that the standstill period is designed to force the senior agent to commence the exercise of remedies within a certain period of time, but is not designed the measure how quickly it will take the senior agent to complete such exercise of remedies.

16 ACTIONS THAT CAN BE TAKEN BY THE JUNIOR AGENT DURING THE STANDSTILL PERIOD 16 The junior agent is entitled to take certain actions to preserve its position during the standstill period. While the scope of these actions is a matter of negotiation among the parties, there are certain commonly permitted actions which include the following: Filing a proof of claim or statement of interest in an insolvency proceeding with respect to the junior debt or other interests in the debtors Take any action that is not adverse to the interests of the senior agent which is necessary to perfect or to maintain the perfection of the junior agent s security interest in the collateral File any necessary responsive pleadings to any pleading that is filed or in any adversary proceeding objecting to or seeking the disallowance of the junior claims Voting on a plan of reorganization Join (but not control) any foreclosure proceeding with respect to the collateral

17 TURNOVER PROVISIONS INTERCREDITOR AGREEMENTS 17 If the junior agent receives any proceeds of the senior agent s priority collateral, the junior agent is obligated to turn over such proceeds to the senior agent. Generally this is not a surprising result, and is necessary to ensure that the senior agent receives the proceeds of its priority collateral. Certain exceptions are necessary to avoid unintended consequences. For example, it is not unusual in a split collateral intercreditor agreement to provide that if cash or other proceeds of working capital priority collateral are used to purchase equipment or other term priority collateral then such equipment constitutes term priority collateral and does not constitute proceeds of the working capital priority collateral. Given the likelihood that the working capital agent may be sweeping cash in the Loan Parties collection accounts on a daily basis, the working capital agent often is concerned about being required to turn over proceeds of the term priority collateral that are inadvertently applied to the working capital obligations if proceeds of term priority collateral are commingled with proceeds of working capital collateral in such deposit accounts.

18 III. PAYMENT BLOCKAGE PERIODS AND CLAIM STANDSTILLS IN SUBORDINATION AGREEMENTS 18

19 III. PAYMENT BLOCKAGE PERIODS AND CLAIM STANDSTILLS IN SUBORDINATION AGREEMENTS 19 The junior creditors typically are only entitled to receive regularly scheduled interest payments and certain payments of expenses. Typically, the junior debt does not provide for amortization payments. If the junior credit documents do provide for amortization payments, such payments may be permitted subject to the payment blockage rights set forth below. The commencement of a payment blockage period cuts off the junior creditors right to receive and retain payments during the applicable payment blockage period. In a subordination agreement with deep subordination, the junior creditors may be restricted from receiving any payments until the senior debt is paid in full. In a more negotiated subordination agreement, the junior creditor may be entitled to receive the approved categories of payments described above until a triggering event has occurred (usually some type of event of default under the senior credit facility). The length of payment blockage periods are negotiated and often depend on the type of event of default under the senior credit facility. Bankruptcy or payment defaults typically are treated differently than other events of default that do not involve a payment default.

20 III. PAYMENT BLOCKAGE PERIODS AND CLAIM STANDSTILLS IN SUBORDINATION AGREEMENTS 20 The claim standstill provisions of subordination agreements prohibit the junior creditors from exercising remedies that are available to unsecured creditors including each of the following types of enforcement actions: Acceleration of the junior debt; Commencing litigation against the loan parties to enforce the terms of the junior debt documents; and Commencing an involuntary bankruptcy proceeding with respect to any of the loan parties. Such claim standstill provisions are designed to give senior creditors time to engage in negotiations with the loan parties regarding the terms of a restructuring to address the existing events of default. Often, the standstill period is triggered by the occurrence and the continuation of any event of default under the junior credit facility, following the delivery of written notice of such event of default by the junior agent to the senior agent. The Length of the claims standstill period and what enforcement actions are restricted is negotiated from deal to deal.

21 TURNOVER PROVISIONS SUBORDINATION AGREEMENTS 21 The turnover provisions of a subordination agreement requires each junior creditor to hold in trust and to pay over to the senior agent all payments or other distributions in respect of the junior debt received by such junior creditor from any of the loan parties. The turnover provisions helps to implements the payment blockage provisions. In addition, the turnover provisions ensure that the claim subordination provisions are given effect and that the payments and distributions on account of the junior debt are applied to satisfy the senior obligations until such senior obligations are paid in full. The effect of the turnover provision results in a double dividend for the benefit of the senior creditors. The double dividend results due to the fact that the subordination agreement survives the commencement of a bankruptcy proceeding. Until the senior debt is paid in full and the commitments under the senior credit facility are terminated, the senior creditors are entitled to receive the full amount of the distributions that are made in the bankruptcy proceeding on account of the senior debt plus the full amount of the distributions that are made in the bankruptcy proceeding on account of the junior debt. In order to preserve the benefit of the double dividend it is important that the junior creditors not be permitted to convert the junior debt into equity without the consent of the senior agent.

22 IV. COMMONLY NEGOTIATED ISSUES RELATED TO STANDSTILL PERIODS AND PAYMENT BLOCKAGE PERIODS 22

23 IV. COMMONLY NEGOTIATED ISSUES RELATED TO STANDSTILL PERIODS AND PAYMENT BLOCKAGE PERIODS 23 A. Triggering Event For the Standstill Period B. Length of Standstill Period C. Continuation of the Standstill Period D. Resetting the Standstill Period E. Scope of the Standstill F. Turnover of Term Priority Collateral G. Triggering Event for and Length of Payment Blockage H. Scope of Payment Blockage

24 A. TRIGGERING EVENT FOR THE STANDSTILL PERIOD Senior Agent s Perspective In the case of an intercreditor agreement, the junior creditors should be required to accelerate the junior debt in order to commence the running of the standstill period under the intercreditor agreement. Such a requirement is necessary in order to ensure that the standstill period is only commenced based upon the occurrence and continuation of an event of default that is sufficiently material for the junior agent to otherwise exercise secured creditor remedies with respect to the collateral. Permitting the standstill period to be commenced based solely on the occurrence and continuation of any event of default or a statement that the junior agent intends to exercise secured creditor remedies with respect to the collateral is not sufficient to ensure that such event of default is material enough that the junior agent would have commenced the exercise of secured creditor remedies remedies with respect to the collateral based on such an event of default at such time but for the intercreditor agreement. In the case of a subordination agreement where the junior debt is not secured, however, the standstill period with respect to the unsecured creditor remedies may be commenced based on any event of default. This is due to the more limited nature of the remedies available to be exercised by the junior creditors for such a facility.

25 A. TRIGGERING EVENT FOR THE STANDSTILL PERIOD Junior Agent s Perspective The junior agent should be permitted to commence the standstill period based on the occurrence and continuation of any event of default under the junior debt documents. If the junior agent would otherwise be entitled to commence the exercise of remedies based on the occurrence and continuation of the existing events of default, this should be sufficient to authorize the junior agent to deliver a standstill notice. Requiring the acceleration of the junior debt may result in a an acceleration of the junior debt earlier in the process, given the existence of the standstill period. If the occurrence and continuation of any event of default under the junior debt documents is sufficient to commence the standstill period with respect to unsecured creditor remedies, then the same should be the case for secured creditor remedies. Even if the occurrence and continuation of any event of default under the junior debt documents is not sufficient, the delivery of written notice of to the senior agent of the junior agent s intent to commence the exercise of secured creditor remedies following the end of the standstill period should be sufficient.

26 B. LENGTH OF THE STANDSTILL PERIOD Senior Agent s Perspective The standstill period should be at least 180 days. This is necessary to ensure that that the senior agent has enough time to evaluate the existing events of default, engage in workout discussions with the loan parties and determine what action is appropriate to liquidate the collateral or priority collateral, as applicable, and obtain the payment in full of the senior debt. Even when the senior agent has determined that an exercise of remedies is necessary, it may take a significant period of time to identify potential buyers before the senior agent can commence the exercise of remedies. Forcing a premature exercise of remedies may result in a lower valuation for the assets of the loan parties. The standstill period should be extended for any period of time during which the senior agent is enjoined from exercising remedies.

27 B. LENGTH OF THE STANDSTILL PERIOD Junior Agent s Perspective The standstill period should be no longer than 120 days. Four months is more than enough time for the senior agent to evaluate the existing events of default. If there are extended discussions regarding the exercise of remedies, the junior agent should have a seat at the table for these discussions. The standstill period extends indefinitely while the senior agent is exercising secured creditor remedies, so the standstill period with respect to the exercise of secured creditor remedies need only be long enough for the senior agent to determine whether to commence the exercise of secured creditor remedies. There is no reason to extend the standstill period for a period of time during which the senior agent is enjoined from exercising remedies because the senior agent can still evaluate and negotiate the event of default during that time and if the senior agent exercises remedies after enjoinment, that will extend the standstill period.

28 C. CONTINUATION OF THE STANDSTILL PERIOD Senior Agent s Perspective Any exercise of secured creditor remedies by the senior agent with respect to the applicable collateral should be sufficient to continue the standstill period. The junior agent should not be able to dictate the method of exercising remedies by requiring a certain type of exercise of remedies. If the senior agent is able to accomplish the repayment in full of the senior obligations by collecting receivables and liquidating inventory, it should not be required to take on a more time consuming and expensive effort of selling other assets or selling the business as a going concern. The senior agent needs to retain discretion to determine what action with respect to the applicable collateral is appropriate under the circumstances. 2. Junior Agent s Perspective The senior agent should be required to commence the exercise of remedies with respect to substantially all of the collateral. This is necessary to prevent the exercise of remedies from continuing indefinitely. If any action is sufficient, the senior agent would be permitted to merely sweep cash but to otherwise permit the Borrower to continue to operate its business in the ordinary course of business. The junior agent is not seeking to specify what actions are to be taken, but at a minimum, the senior agent should be required to commence the exercise of remedies with respect to a material portion of the applicable collateral.

29 D. RESETTING THE STANDSTILL PERIOD Senior Agent s Perspective It is important that the standstill period be reset. Otherwise, the junior agent would be entitled to immediately commence the exercise of remedies in the future if the existing events of default have been waived or cured. If the junior agent elects to waive the events of default that were the subject of the original standstill notice, then this should be sufficient to reset the standstill period. 2. Junior Agent s Perspective The standstill period generally should not be reset. The junior agent has no control over whether the events of default under the senior documents are waived or cured. The senior agent should not have the ability to commence a new standstill period by waiving certain of the existing events of default. At a minimum, there should be no events of default under the junior loan documents in order for the standstill period to reset.

30 E. SCOPE OF THE STANDSTILL PERIOD Senior Agent s Perspective The junior agent and the junior lenders should not be permitted to commence an involuntary bankruptcy proceeding. The only reason to do so would be to interfere with an exercise of remedies by the senior agent. Such an action would otherwise be prohibited by the intercreditor agreement. The junior agent should not be permitted to sue the loan parties to enforce the terms of the junior loan documents. Such an action could include obtaining an injunction to prohibit a sale of the collateral. This type of relief would interfere with the sale or other liquidation of the collateral in a manner that would otherwise be prohibited by the terms of the intercreditor agreement. In a split collateral intercreditor agreement, the term loan agent should not be entitled to exercise remedies against the deposit accounts that are included in the loan parties cash management system. Such an action would be permit the term loan agent to interfere with the cash dominion process that may have been commenced by the working capital agent.

31 E. SCOPE OF THE STANDSTILL PERIOD Junior Agent s Perspective The junior agent and the junior lenders should retain their right to commence an involuntary bankruptcy proceeding with respect to the Loan Parties. Such a remedy is available to any unsecured creditor as well as each of the Loan Parties. Their unsecured creditor remedies should not be impacted by the intercreditor agreement. Similarly, the right of the junior agent to enforce the terms of the junior loan documents should not be limited by the terms of the intercreditor agreement. If there is a restriction on the right of the junior agent to take such an action, the intercreditor agreement should only provide that the terms of the junior loan documents do not limit the right of the senior agent to exercise remedies against the collateral and should not limit the right of junior agent to enforce the terms of the junior loan documents against the loan parties. The intercreditor agreement should not treat deposit accounts differently from other assets. If the deposit accounts contain term loan priority collateral, then such deposit accounts should be treated like all other term loan priority collateral. The working capital agent would have the first right to exercise remedies with respect to cash management accounts that constitute working capital priority collateral as a result of the standstill, so there is no need to create a special rule with respect to such deposit accounts.

32 F. TURNOVER OF TERM PRIORITY COLLATERAL Senior Agent s Perspective In a split collateral intercreditor agreement, unless the working capital agent has received prior written notice that funds in the deposit accounts contain identifiable proceeds of term loan priority collateral, the working capital agent should be entitled to presume that all such funds constitute working capital priority collateral. Such a presumption is necessary due to the fact that the working capital agent may be exercising cash dominion pursuant to the terms of the working capital loan documents. If the working capital agent sweeps the funds in such accounts and applies such funds to the revolving loans and is required to later turn over a portion of such funds that were so applied to the loan balance, the working capital lenders may be forced into an overadvance. If the term loan agent wants to require the working capital agent to turn over identifiable proceeds of term loan priority collateral that have been deposited in the cash management accounts, the term agent should provide prior written notice of such funds to the working capital agent. Otherwise, such identifiable proceeds of term loan priority collateral should be deposited in a separate term loan deposit account. Otherwise, the working capital agent will not be able to manage the working capital loan documents in accordance with the limitations in the borrowing base.

33 F. TURNOVER OF TERM PRIORITY COLLATERAL Junior Agent s Perspective In a split collateral intercreditor agreement, the working capital agent should be obligated to turn over to the term loan agent identifiable proceeds of term loan priority collateral. Such proceeds are not funds that the working capital agent is entitled to retain and they should not be treated differently than other assets. The term loan agent does not have control over the account in which such proceeds are deposited and should not be at risk of losing such funds based on the account number into which such identifiable proceeds of term loan priority collateral are deposited. In addition, often the term loan agent would not know whether such funds have been deposited into deposit accounts that constitute working capital priority collateral. As a result the term loan agent would not have the ability to provide prior written notice of the deposit to the working capital agent. The working capital lenders would get a windfall if they were entitled to retain the proceeds of term loan priority collateral. In addition, the application of such funds should create availability under the working capital loan documents. At a minimum, the working capital agent should be required to turn over such proceeds to the extent that it would not result in an overadvance.

34 G. TRIGGERING EVENT FOR AND LENGTH OF PAYMENT BLOCKAGE Senior Agent s Perspective There should be two categories of triggering events for payment blockage periods payment defaults and bankruptcy defaults and other events of default under the senior credit facility. In the case of a payment default or bankruptcy default, the payment blockage period should be permanent until the default is waived and should occur immediately without the requirement of providing notice to the junior agent. Payment defaults and bankruptcy defaults are the most material events of default in the senior credit agreement and should have immediate effect. In addition, once the senior debt has been accelerated, the standstill period with respect to unsecured creditor remedies terminates thus allowing the junior agent to exercise unsecured creditor remedies. In the case of other events of default, the senior agent would be required to provide written notice of its intent to commence the payment blockage period, which would continue for 180 days. Upon the expiration of the payment blockage period, catchup payments under the junior debt documents that were blocked during such period would be permitted to be paid. If senior credit facility is in default, junior creditors should not be entitled to receive payments; that is the essence of the bargain.

35 G. TRIGGERING EVENT FOR AND LENGTH OF PAYMENT BLOCKAGE Junior Agent s Perspective The delivery of written notice of any event of default, including any payment default should be required. Otherwise, the junior creditor may not be aware of the existence of the event of default under the senior debt documents and may distribute payments to the junior creditors without knowing that an event of default under the senior debt documents has occurred. A one hundred eighty day blockage period for non-bankruptcy and non-payment defaults is too long. Senior creditors can accelerate and cause an indefinite payment blockage; why do they need 180 days to make that decision? This could result in two quarterly interest payments being blocked. The senior creditors should not need more than 120 days to make this decision. The number of payment blockage periods that are based on an event of default other than a payment default or a bankruptcy default must be limited to no more than one such blockage period in any 360 day period and three such blockage periods over the life of the deal. Multiple payment blockage periods indicate a fundamental problem with the credit. If the senior creditors want to block the payment of interest more frequently than that, they should accelerate the senior debt and permit the junior creditors to commence the exercise of unsecured creditor remedies.

36 H. SCOPE OF PAYMENT BLOCKAGE Senior Agent s Perspective The payment blockage provisions should apply to all payments in respect of the junior debt other than reasonable out of pocket expenses expenses (subject to a cap) and junior securities issued pursuant to a plan of reorganization approved by the senior creditors. While the senior creditors may be willing to agree to a certain amount of expense reimbursements that can be made, this needs to be limited. Given that the junior creditors may be commencing litigation against the loan parties and preparing for a bankruptcy filing these expenses may be significant. Allowing these amounts to be paid ahead of the senior creditors would reverse the priorities and may significantly impair the recovery by the senior creditors. Similarly, any allowed distributions in a bankruptcy proceeding must be turned over to the senior creditors. While an exception may be made for junior securities that are distributed in a plan that is approved by the senior creditors, the terms of these securities must be approved by the senior creditors. Allowing permitted payments beyond these may negatively impact the liquidity of the borrower and erode the senior creditors senior position with respect to the collateral and to the loan parties.

37 H. SCOPE OF PAYMENT BLOCKAGE Junior Agent s Perspective Junior creditors should be able to accrue interest payments that are not permitted to be paid during a payment blockage period. These interest payments should be able to be paid after the end of the payment blockage period. In the interim, the accrued default interest will be subordinated so this should not adversely impact the interests of the senior creditors. Junior creditors should also be entitled to be reimbursed for all reasonable expenses that they incur in connection with the case. These amounts reflect expenses that were paid out of pocket by the junior creditors and it is not possible for junior creditors to predict what their expenses will be under the junior credit facility. The junior creditors should be reimbursed for these reasonable out of pocket expenditures. Junior creditors should be entitled to retain junior securities issued pursuant to any plan of reorganization. The senior creditors should be able to protect themselves by providing some reasonable requirements regarding the terms of the junior securities, such as a requirement that any such debt securities be subject to subordination provisions that are substantially the same as the provisions of the subordination agreement. If the junior debt is an applicable high yield discount obligation, the borrower must be able to make catch up payments to ensure that it does not lose a federal income tax deduction for all interest payments to the junior creditors.

38 KATHERINE BELL 38 Katherine Bell is a partner in the Finance and Restructuring practice of Paul Hastings and is based in the firm s Orange County office. Her practice focuses on commercial and corporate finance transactions. Ms. Bell regularly represents banks, finance companies, other lenders, and borrowers in working capital facilities (asset-based and cash flow), acquisition financings, and other leveraged finance transactions and restructurings. Ms. Bell has negotiated intercreditor relationships across a variety of structures, including 1st lien/2nd lien transactions, split collateral arrangements, and unitranche structures. She has industry experience in a variety of business sectors and has considerable experience in cross-border transactions. Partner, Corporate Department 695 Town Center Drive Seventeenth Floor Orange County, CA P: 1(714) F: 1(714) katherinebell@paulhastings.com Ms. Bell recently co-authored Asset-Based Lending: A Practical Guide to Secured Financing (Practising Law Institute, 8th ed. 2015), which is generally considered to be the definitive treatise on asset-based lending.

39 PETER BURKE 39 Peter Burke is a partner in the Finance and Restructuring practice of Paul Hastings and is the Chair of the firm s Corporate Department in the firm s Los Angeles office. Mr. Burke has over twenty years of experience in various commercial and corporate finance transactions. Mr. Burke regularly represents banks, finance companies and other lenders in working capital facilities (asset-based and cash flow), acquisition financings, and other leveraged finance transactions and restructurings. Mr. Burke has negotiated intercreditor agreement and subordination agreement in various structures, including 1st lien/2nd lien transactions, split collateral intercreditor agreements, unitranche structures and in connection with subordination agreements. Peter S. Burke Partner, Corporate Department 515 South Flower Street Twenty-Fifth Floor Los Angeles, CA P: 1(213) F: 1(213) peterburke@paulhastings.com Mr. Burke has industry experience in a variety of business sectors and has extensive experience in cross-border transactions.

40 JENNIFER HILDEBRANDT 40 Jennifer Hildebrandt is a partner in the Corporate practice of Paul Hastings and is based in the firm s Los Angeles office. Ms. Hildebrandt represents banks and other lenders in commercial and corporate finance matters, leveraged finance transactions (including acquisition financings, structured financings, and recapitalizations), asset-based finance transactions, multi-tranche and multi-lien transactions, and restructurings. In particular, Ms. Hildebrandt has extensive experience representing lenders in two lien deals, unitranche transactions, and bank-bond deals. In addition, she has experience in various business sectors including healthcare, information technology, media, restaurants, casinos, manufacturing, and vehicle and airline transportation, and in cross-border transactions. Ms. Hildebrandt was ranked in Chambers USA (California Banking and Finance) in 2013, 2014 and Jennifer B. Hildebrandt Partner, Corporate Department 515 South Flower Street Twenty-Fifth Floor Los Angeles, CA P: 1(213) F: 1(213) jenniferhildebrandt@paulhastings.com

41 JENNIFER YOUNT 41 Jennifer Yount is the chair of the Paul Hastings Finance and Restructuring practice and is based in the firm s New York and Los Angeles offices. Her practice primarily consists of representing banks, finance companies, and other lenders in working capital financings (asset-based and cash flow), acquisition financings, bank/bond transactions, restructurings, and debtor in-possession and exit financings. Ms. Yount has negotiated numerous intercreditor and subordination agreements in 1st lien/2nd lien, split collateral, and mezzanine financings and agreements among lenders in unitranche and FILO financings. She has industry experience in a variety of business sectors and has extensive experience with cross-border transactions. Partner, Corporate Department 200 Park Avenue New York, NY P: 1(212) F: 1(212) jenniferyount@paulhastings.com 515 South Flower Street Twenty-Fifth Floor Los Angeles, CA P: 1(213) F: 1(213)

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