UNITRANCHE FINANCING AND SECOND LIEN LOANS A Review of Selected Issues April 30, 2015

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1 UNITRANCHE FINANCING AND SECOND LIEN LOANS A Review of Selected Issues April 30, 2015 Key Characteristics: 1 st Lien/2 nd Lien In this traditional structure for financing, there are two separate groups of lenders, each with their own collateral agent. Each group of lenders negotiates and documents with the borrower a set of credit documents that govern the terms upon which such group of lenders will extend credit to the borrower. The covenants may be different under the two sets of documents; second lien covenants will be no more restrictive than the first lien covenants, and with cushions to first lien financial covenants and certain other covenants and defaults. Each set of credit documents grants a separate lien on a common pool of collateral to secure the obligations of the borrower to each group of lenders. The 1 st lien and 2 nd lien lenders separately negotiate and enter into an intercreditor agreement whereby the lenders agree, among other things, that the 1 st lien lenders will be senior in priority with the respect to the collateral pool (such that they will be paid first from proceeds of collateral) and that the 1 st lien lenders will control rights with respect to the enforcement of remedies against the borrower. This is commonly referred to as lien subordination. The intercreditor agreement typically has additional provisions regarding the rights of the lenders to amend their credit documents and participate in a bankruptcy by the borrower. The 2 nd lien debt is not subordinated to the 1 st lien debt. Subordinated Debt Financing In a typical subordinated debt structure, there are two separate groups of lenders. Each group negotiates and documents with the borrower a 1

2 set of credit documents that govern the terms upon which such group will extend credit to the borrower. The covenants may be different under the two sets of documents; the subordinated debt will be no more restrictive than the senior debt covenants, and with cushions to senior debt financial covenants and certain other covenants and defaults Typically the subordinated debt is extended on an unsecured basis without a lien on the collateral. The senior and subordinated lenders negotiate and enter into an intercreditor agreement whereby the subordinated debt is contractually subordinated to the senior debt. The subordinated lenders agree to payment blocks on the subordinated debt in certain circumstances until the senior lenders are paid in full. The subordinated lenders also typically agree to a remedy standstill period during which subordinated lenders will not to exercise any remedies. The intercreditor for subordinated debt typically has more limited bankruptcy provisions; while those provisions include a full payment block on the subordinated debt during an insolvency proceeding, they do not otherwise restrict the rights of the subordinated creditor in the bankruptcy case. A hybrid document has developed in the market often referred to a "mezzanine with a lien" where the intercreditor agreement combines lien subordination and debt subordination. The lien would be "silent second", prohibiting any action against collateral at any time, requiring a drag-along on lien releases and fulsome waivers of all secured creditor rights in bankruptcy. The most-favorable of these hybrid documents also contain a clause that requires the second lien lender to join any objections to DIP financing, use of cash collateral or sale of collateral, to the extent objected to by the first lien agent. 2

3 Unitranche Financing Unitranche financing transactions are characterized by the following: o Single Agreement - Unlike 1 st lien/2 nd lien transactions and senior/subordinated debt transactions. unitranche financing transactions are based on a single set of credit documents negotiated and executed by the borrower and all lenders, containing a single set of covenants. o Single Agent Unitranche financing transactions have a single agent who is responsible for administration of all obligations under the unitranche facility. o Single Collateral Pool The borrower and guarantors grant a single lien to the agent in the collateral pool to secure all obligations under the unitranche facility. o Agreement Among Lenders (AAL) In a separate document referred to as an Agreement Among Lenders, the lenders agree to create separate first out and last out tranches of the unitranche loan. The AAL allocates the interest to be earned by each tranche and provides for a waterfall governing application of payments and distribution of proceeds to each tranche, notwithstanding the terms of the credit documents with the borrower to the contrary. The AAL also redistributes the voting rights of lenders in the unitranche facility, varying whether first out lenders or last out lenders control Required Lender voting decisions before and after certain trigger events. The AAL will provide the last out lenders have the right to buy out the first out lenders on certain trigger events, and there may be an option for the first out lenders to buy out the last out lenders under other circumstances. The AAL will also govern the rights of lenders to participate in a bankruptcy by the borrower. The borrower often does not sign (and in many cases does not even see) the AAL, 3

4 although the market continues to develop on this point, with many equity sponsors and their counsel now demanding to see the AAL and some practitioners recommending that the borrower become an acknowledgement party. o Interest Rate The unitranche facility has a single interest rate derived on a blended basis. As indicated above, the AAL reallocates interest to the lenders in the facility depending on their priority with the higher effective rate going to the last out tranche to compensate them for their increased risk in being subordinate with respect to payments under the unitranche loan. The allocated rates are generally based on the last out lenders yield requirements with the first out lenders receiving the balance. The agent is responsible for receiving and reallocating the interest payments under the AAL. o Term v. Revolver The unitranche facility may include a revolving commitment as part of the facility, or the revolver may be in a stand alone facility outside the unitranche facility. If the revolver is included in the unitranche facility, the parties will negotiate whether there will be any "skim" on the interest paid to revolver lenders, which will often depend upon whether the borrower or sponsor negotiated for a lower "market standard" rate of interest for the revolver. o Cash Flow versus Asset Based As is the case for 1 st lien/2 nd lien intercreditor structures, the unitranche facility has found participants in both cash flow and assetbased structures. In some cases, the unitranche may be further allocated between asset-based, revolving lenders, cash flow "first out" lenders and cash flow "second out" lenders. In some instances, the second out lender underwrites and closes on the entire facility and then brings in a senior revolving lender post-closing. 4

5 What Forms Do Unitranche Investments Take? Joint venture/fund In a joint venture structure, the first out and last out lenders combine capital in one entity that lends to the borrower; intercreditor issues are handled in the JV/fund documents. One shared credit agreement with Agreement Among Lenders The first out and last out lenders jointly commit to extend credit to a borrower in one credit agreement, with intercreditor terms housed in a separate AAL. Programmatic loans with pre-negotiated intercreditor terms A number of market participants have attempted to develop unitranche lending programs with a pre-negotiated form AAL that would be used for opportunities that either fit a particular structure or otherwise can be used to demonstrate an "easier" closing in order to win the mandate. One shared credit agreement, including intercreditor provisions In some instances, the first out and last out lenders jointly commit to extend credit to a borrower in one credit agreement, and include the voting and waterfall provisions directly in the credit agreement with no separate AAL. these one-off loans with established intercreditor provisions between the first out and last out lenders are in turn funded through a joint venture vehicle that may give the senior lender a "first out" or cross-collateralized position in the fund. Market for Unitranche Loans: How did market develop? Different people have different theories, but many credit Cerberus with being among the first funds in the early 2000s to develop "split collateral" waterfalls within a single credit agreement, where the working capital lender would have 5

6 a first right of payment from accounts and inventory and the term lenders would have a first right of payment from all other assets. It was not a stretch to find senior lenders willing to purchase a piece of the term loan (in many cases supported by hard assets) with the other lenders taking the remainder of the term loan supported by enterprise value. When that arrangement was coupled with a "priority" in the waterfall and a private reallocation of the interest to account for the different risk, the "side letter" or AAL was the result. Early AALs were very short, often only covering the skim, purchase options and some bespoke voting issues. Today, a typical AAL can be over 60 pages. Who are the significant players? On the senior side: GE Capital, Wells Fargo Capital Finance, PNC, and City National Bank are major players. On the junior side, Cerberus, Ares, Goldman Sachs, Golub, Kayne Anderson, LBC Credit Partners, TPG, TCW and Sankaty are common participants. What is market demand for the product? In recent years, the unitranche facility has grown its share of the overall middle market. The GE Capital/Ares unitranche product was well received by private equity sponsors looking for certainty of financing for acquisition bids, and sparked an increase in the number of interested players in this product. The unitranche product is even more popular in Europe, so funds that have both European and US presence will be even more likely to offer the product. How has product changed? The product started as the senior lender taking the largest piece and finding a fund to take one more turn of the capital. Nowadays, the hedge fund may commit to a large portion or all of the deal and find smaller pieces to sell to the first out lenders. The early AALs were mostly term loans and based on hard asset values for the senior piece. Now you'll see synthetic cash flow deals with first out/second out 6

7 participants similar to the 1 st lien/2 nd lien market. Synthetic mezzanine is also becoming more popular where mezz funds try to get mezzanine pricing but benefit from the lien available through the unitranche structure. At the far end of the pro-junior spectrum are the "springing voting" structures where the second out lenders constitute "required lenders" for most issues and the senior lenders only have voting/blocking rights, or remedies rights, upon the occurrence of key trigger events such as payment defaults, fixed charge coverage defaults and bankruptcy. In 2013, the market for middle market loans (loans to companies with revenues of less than $500 million and EBITDA of less than $100 million) was estimated at $204 billion (Thomson Reuters LPC, Leveraged Loan Monthly Year End 2013 Report). Thomson Reuters year end survey forecasts the increased popularity of unitranche financing, predicting that the structure would be second only to traditional 1 st lien/2 nd lien financings for private equity portfolio companies. Advantages of Unitranche Structure compared to 1 st lien/2 nd lien or other senior debt structures. Speed of Transaction With only one set of documents to be negotiated, unitranche financings are viewed as particularly attractive in situations such as acquisition financing where there is a short time frame to closing. Certainty of Closing One of the most attractive features of the structure is certainty of closing. In many unitranche transactions, the entire deal is committed by the unitranche fund, by a single fund that will sell the deal down later or by two or more lenders that have partnered and pre-negotiated the intercreditor terms. Eliminating syndication risk 7

8 and marketing period for the deal can be very attractive to the seller and prospective private equity sponsor. Reduced Closing Costs Because there are fewer documents and less negotiation, costs of documenting the transaction should be reduced. Post-Closing Administration Simplicity Unitranche financings have only one set of covenants and one reporting package and therefore are easier to administer on a postclosing basis. Disadvantages of Unitranche Structure compared to 1 st lien/2 nd lien or other senior debt structures: Less established market and no model forms the market is developing, and while there are areas in which consistency in deals is starting to develop, the unitranche structure is so varied and less common that it is much harder to define what is market in these deals. Various deal points may vary based on first out/last out hold sizes, which facility the agent holds, as well as how hard it is to sell the first out or last out. Deals are not widely syndicated, so terms are not as visible to the market. There are no model forms, and each AAL needs to be closely reviewed. More "last out" friendly than the 1 st lien/ 2 nd lien market in general, the unitranche product is more last out friendly than a traditional 2 nd lien transaction. Fewer data points for court enforcement the 1 st lien/2 nd lien market is further developed, including establishing precedent for court enforcement. Bankruptcy court treatment of the unitranche product is harder to find, and the case law is less developed. 8

9 Difficulty in syndication the unitranche product is not well suited to a widely syndicated transaction. The lack of consistency in the AAL terms and overall structure of the product makes it harder to sell the unitranche product beyond a club group. The AAL overlay on top of the credit agreement, sold to a larger syndicate of lenders becomes a complicated product to administer/enforce. Bankruptcy specific complications Bankruptcy waivers must be carefully drafted given that there is only one lien holder (the Agent) acting for the benefit of all lenders generally. The market has developed to adopt waivers that are substantially similar to those found in second lien intercreditor agreements. However, the treatment of adequate protection payments and credit bidding must be separately considered given the pro rata right to participate among all lenders generally. Class voting and allocation of permitted reorganization securities are also challenging topics with respect to which the market has not developed consistent approaches. Key Considerations In Evaluating the Risk of a Unitranche Structure Parties to the AAL The borrower is often not a party to the AAL in a unitranche financing, although there an increasing number of deals where this is changing, particularly when sophisticated equity sponsors insist on seeing and approving all deal terms. In a 1 st lien/2 nd lien financing, the borrower is typically a party to (or at least has knowledge of the terms of) the intercreditor agreement. Enforceability in Bankruptcy Treatment of the AAL by the bankruptcy court is less certain than the treatment of 1 st lien/2 nd lien intercreditors. However, one of the most famous inter-lender cases that ruled on the language required to pay the senior lender interest ahead of the junior lender's principal was in fact a "unitranche" case but that term 9

10 wasn't used at that time. There was one collateral trustee, one lien, and multiple tranches of certificates. The Court would have enforced the agreement among lenders to allocate principal to the senior lender's interest had the agreement been more specific. All intercreditors and unitranche AALs today should contain that now infamous language for the payment of interest on the 1 st lien and first out tranche "whether or not allowed" in the bankruptcy proceeding. A threshold issue is whether the bankruptcy courts have jurisdiction to decide disputes between lenders that arise under the AAL. Because the borrower is not a party to the AAL, the bankruptcy court may be reluctant to extend its jurisdiction to a dispute between lenders that does not implicate the borrower. However, Section 510(a) of the Bankruptcy Code speaks to the enforceability of subordination agreements: (a) A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law. 11 U.S.C. 510(a). Thus, to the extent the AAL is considered a subordination agreement based upon the lenders intention to subordinate one lender s rights against the borrower to those of another lender and the AAL is otherwise enforceable under state law, it should be enforceable in bankruptcy, particularly if the outcome of the dispute affects the borrower. Enforceability outside Bankruptcy Enforceability of the AAL outside of bankruptcy is subject to state law. Lenders face the risk that the bankruptcy court may refuse to enforce the AAL within the bankruptcy proceedings, forcing the lenders to turn to state court proceedings to resolve any disputes under the AAL. The bankruptcy court may 10

11 further refuse to delay the bankruptcy proceedings to allow for final adjudication of the state law issues. Risk of secret agreement To the extent that the borrower is unaware of the terms of the AAL which contain fundamental rights such as voting rights, there is a risk that the borrower will attempt to characterize the AAL as a secret agreement that runs afoul of the lenders obligations of good faith and fair dealing as to the borrower. To counter this risk, many credit agreements today will include language like "except as otherwise provided in the AAL" or "subject to the AAL" where appropriate. Waterfall The waterfall is the means by which the first out, last out payment prioritization is affected. Notwithstanding the terms of the credit agreement, the AAL will often reallocate payments made by the Borrower under the credit agreement. Payments may be applied in accordance with the credit agreement until a trigger event occurs; prior to a trigger event occurring, interest payments (subject to the reallocation of interest between first out and last out lenders in the AAL), and, in some instances, principal payments, made by the borrower in the ordinary course will be apportioned among the first out lenders and last out lenders in accordance with their pro rata shares of the debt. Prepayment premium on voluntary prepayments and certain other fees may all be allocated to the last out lenders. The blended interest rate and method of apportionment are negotiated and are unique for each deal. In some deals all amortization under the credit agreement, as well as mandatory prepayments, are reallocated to the first out loan under the AAL. 11

12 After the waterfall is triggered, all collateral proceeds and payments from the borrower flow through the waterfall and are paid first to the first out lenders until such time as the first out obligations are paid in full, then to the last out lenders. The waterfall is typically triggered by the following: o Payment default o Bankruptcy o Financial Covenant hurdles - Achieving a certain leverage ratio (is generally inside the financial covenant) or the occurrence of a financial covenant default often triggers the waterfall, although this is a hotly contested triggering point since reallocating interest payments to the senior lenders upon a financial covenant default is an attribute of mezzanine financing and is objected to by many 2nd lien lenders. o Commencement of exercise of remedies, including acceleration. o Failure to deliver a borrowing base certificate by the deadline for ABL deals only. Exercise of Remedies The unitranche market began with the notion that the first out lenders, as part of the same credit facility, should have a breathing spell before the senior lenders could force an aggressive exercise of remedies. In some cases, this period would be as long as 60 days. The market has moved toward the 1 st lien/2 nd lien structure with much less "first out standstill" periods ranging from 0 to 45 days, with "exigent circumstances" exceptions to any notice periods. Conversely, last out lenders cannot direct the Agent to exercise remedies from between 45 to 120 days, with 90 days being most frequent. Upon the applicable standstill expiration, the majority first out lenders or majority last out lenders may cause the Agent to terminate commitments and commence 12

13 the exercise of remedies. A key point in negotiation is whether the Agent selects the remedies in its good faith determination or whether the requisite lender tranches can give specific instructions that the Agent is required to follow. Purchase Options Generally, the AAL provides the last out lenders with the right to purchase the obligations owed to the first out lenders upon the occurrence of certain trigger events (e.g., payment default, first out lenders do not consent to an amendment of the credit agreement proposed by the last out lenders or agreed to by the required lenders, bankruptcy filing, acceleration or the exercise of remedies by the agent, sometimes any event of default). If the borrower becomes distressed, this buy-out option is a primary method by which the lenders will solve disputes. The buy-out purchase price is at par plus any accrued interest and cash collateral for letter of credit exposure and may be subject to a claw back for any prepayment premium the purchasing lender receives within a specified time after the purchase. Typically, the buy-out right is only available to those last out lenders holding a minimum percentage of the last out debt; however, first out lenders may request a similar buy-out right. If the buy-out option is triggered due to a first out lender s rejection of a proposed amendment to the credit documents, then the last out lenders may only be required to buy out the dissenting first out lender rather than all first out lenders. Assignability As discussed more fully below, in a unitranche facility a lender s ability to transfer its interest to a third party will require the consent of the agent and be subject to a right of first offer or right of first refusal in favor of other lenders. o Consent A lender may transfer its interest to Eligible Transferees (as defined in the credit agreement) without the consent of the agent. Transfers to other third 13

14 parties will require consent of the agent and the borrower. However, if an event of default (or a specified default) has occurred and is continuing, the borrower s consent is not required for a lender transfer. This is identical to consent rights under a typical 1 st lien/2 nd lien structure. o Right of first offer/right of first refusal Unlike in a typical 1 st lien/2 nd lien structure, the unitranche AAL will generally require that a lender seeking to transfer its interests must first offer that interest to the other lenders prior to transferring such interest to a third party. This may be accomplished by giving the other lenders the right of first refusal ( ROFR ) or the right of first offer ( ROFO ). Typically, the ROFR /ROFO option only applies to last out lenders holding a minimum percentage of the last out debt; however, some AALs may require that the ROFR/ROFO option be given first to those lenders in the offering lender s tranche and then be extended to the other tranche of lenders, prior to the offering lender being allowed to transfer its rights to a third party. Generally, the ROFO purchase price is par and the ROFR purchase price is the market price offered by a potential buyer. Other than the ROFR/ROFO, lenders will generally not have consent rights over another lender s assignment to a third party. The existence of a ROFR/ROFO can impede the ability of a lender to exit a facility quickly. Voting Rights o Amendments to AAL Generally, amendments to the AAL will require the vote of all parties to the AAL. Some AALs permit amendments (other than to certain 14

15 sacred rights provisions) based on a majority or super-majority of each tranche of the first out lenders and the last out lenders. o Amendments to Credit Documents & Exercise of Remedies Under the AAL, amendments to the credit documents and waivers of certain defaults will often require a majority of lenders of both the first out and the last out tranches. A common approach to exercising remedies would allow either tranche of lenders to cause the Agent to exercise remedies. In some instances, however, both the amendment and remedies sections are controlled by the last out lenders absent a trigger event (with a long list of specific provisions that cannot be amended without the consent of each tranche of lenders). Triggers typically include: Payment default Commencement of the exercise of remedies, including acceleration Bankruptcy (or injunction default) Waterfall activation notice sent to Agent by FO Lenders o Cross-over voting Cross-over voting is often restricted (ie., last out lenders cannot vote as first out lenders and vice versa). o Affiliate Lenders/Defaulting Lenders Sponsor s holding of loans and defaulting lenders are concepts further complicate voting issues. Importance of Agent In a typical 1 st lien/2 nd lien deal, the agent for each set of lenders is responsible for exercise of remedies (subject to applicable agreements) and represents the interests of those lenders in any borrower bankruptcy case. In a unitranche structure, there is a single agent who has responsibility for administration of the loan, including the exercise of remedies and who will speak for the lenders in a bankruptcy case. As a result, 15

16 assessing the identity and interests of the Agent is important for each lender is evaluating the vigor with which the Agent will discharge its duties. Bankruptcy Risks o Uncertainty While some guidance can be obtained from bankruptcy court decisions regarding 1 st lien/2 nd lien intercreditor disputes, there are issues and risks that are unique in the unitranche context that have not been tested in bankruptcy. As such, it is uncertain how bankruptcy courts will treat the lender relationships created under the AAL. o Post-Petition Interest, Fees & Expenses As the unitranche financing is secured by a single lien, the bankruptcy court may consider the first out lenders claim and the last out lenders claim as single claim for purposes of section 506(b). In such a case, if the value of the collateral does not exceed the aggregate amount of the first out and last out lenders claims, a first out lender, who would have been oversecured in the traditional 1 st lien/2 nd lien context and entitled to recover interest and expenses, may be deemed undersecured and not entitled to postpetition interests, fees or expenses. Accordingly, the AAL should provide for the reallocation of principal payments from the second out lenders to pay those amounts that otherwise would have been payable to the first out lenders in a twodocument/intercreditor structure, including interest on the first out loans that would have accrued whether or not the bankruptcy proceeding had been commenced. o Classification of Claims & Voting on a Bankruptcy Plan In a traditional 1 st lien/2 nd lien structure, the claims of 1 st lien lenders and the claims of 2 nd lien 16

17 lenders are separately classified under a plan of reorganization. As such, the 1 st lien lenders control the vote of the claims of 1 st lien lenders and the 2 nd lien lenders control the vote of the claims of 2 nd lien lenders. Under Section 1126(c) of the Bankruptcy Code, (c) A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan. 11 U.S.C. 1126(c). In a unitranche financing, because the obligations are memorialized in a single set of credit documents with a single lien, there is risk that the claims of both first out lenders and the claims of last out lenders may be placed in a single class in a plan of reorganization for the borrower. Section 1122(a) of the Bankruptcy Code provides that a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. 11 U.S.C. 1122(a). If the first out lenders and the last out lenders are not separately classified there is a risk that one tranche of lenders may hold a blocking position or a control position with respect to voting on a proposed plan. Where one tranche of lenders has a control position (more than 1/2 in number and at least 2/3 in amount of claims) and votes in favor of a plan, this would result in the plan proponent being relieved of the obligation (1) to demonstrate that the plan is in the best interest of creditors under 11 U.S.C. 1129(a)(7), and (2) that the plan is fair and equitable under 11 U.S.C. 1129(b). 17

18 Section 1129(a)(7) requires as a condition of confirmation of a plan that each class of claims or interests (i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, on the effective date of the plan, that is not less than the amount that such holder would receive or retain if the debtor were liquidated under Chapter 7 of this title on such date Section 1129(b)(1) provides that the Court shall confirm the plan [even if all classes have not accepted the plan] if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted the plan. For the plan to be fair and equitable, the lender class would need to retain its liens on the debtor s assets, and the plan must provide for a stream of payments to the lenders over a reasonable period of time and accruing at an interest rate that reflects the present value of the lenders claims as of the effective date of the plan. Presumably, if one tranche lenders controlled the vote of the class of unitranche lenders under the plan, they could cause the class to accept a plan that fundamentally altered the rights of the lenders agreed to in the AAL over the objection and without the consent of the other tranche of lenders. The market has responded to this risk by providing that, as least in respect of the portion of the claims under the credit agreement secured by the value of the collateral (i.e., "secured claims"), each group of lenders agrees that it will not vote in favor of a plan unless otherwise agreed to by the other group of lenders (either determined by majority or a similar test to that used by the Bankruptcy Code). In this way, no group can force an undesired "cram-down" on the other group. To be sure, one group could "block acceptance" by not voting or voting against the plan, but that merely means that the plan proponent needs to proceed to confirm the plan over the rejection by the class (and presumably with the strong support of a sub-set of that class). Some of the 18

19 more advanced forms in the market also use "power of attorney" language to enforce the agreement to "not vote" in favor of a plan not accepted by the other group within the class. It should be noted that these market adjustments require enforcement of the AAL. Other AALs attempt to define the "first out secured claims" as those claims that would have been "in the money" under a 1 st lien/2 nd lien intercreditor structure and then have the last out lenders agree to not object to the separate classification of the first out secured claims from the last out secured claims. Coupled with the voting rights described above, this separate classification approach would enable the separate treatment for the senior tranche of secured claims. o Credit bidding Unlike the traditional 1 st lien/2 nd lien structure, under many AALs first out lenders can credit bid both the first out obligations and the last out obligations without the consent of last out lenders; or, alternatively, the last out lenders agree that the first out lenders may offset the "first out claims" against the purchase price (and thereby enforcing the waterfall priority). Many AALs provide that last out lenders may credit bid only the last out obligations so long as the first out obligations are to be paid in full in cash at closing. o Sale of Assets Like intercreditor agreements, AALs typically prohibit last out lenders from objecting to the sale of collateral that is supported by first out lenders. In many AALs, this is accomplished by giving the first out lenders the right to direct the Agent to consent to the sale (or object) and have that direction be binding upon all lenders similar to any syndicated credit agreement. 19

20 o DIP Financing/Use of Cash Collateral As in the 1 st lien/2 nd lien context, in a unitranche facility the last out lenders typically waive the right to object to debtor-inpossession financing and the use of cash collateral that is supported by first out lenders based on the lack of adequate protection. Again, this is often accomplished by giving the first out lenders the right to direct the Agent to consent or object. Many AALs also expressly prohibit the last out lenders from providing any "priming" loans. o Plan Allocations One of the more complex aspects of the bankruptcy section of AALs attempt to allocate the various debt and potential equity interests under a plan among the first out and last out holders and whether such instruments are required to be monetized through the waterfall, or whether the instruments would otherwise be retained by the lenders subject to applicable payment subordination as enjoyed under the AAL. Determining what the new AAL terms should be (including the "skim") is typically left to agreement of the parties or order of court. 20