Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

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1 Presenting a live 90-minute webinar with interactive Q&A Drafting Standstills in Intercreditor Agreements: Balancing Rights and Remedies of Junior and Senior Lienholders Structuring Duration, Commencement, Expiration, Notice, Reinstatement and Other Provisions TUESDAY, FEBRUARY 13, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David W. Morse, Atty, Otterbourg, New York Michael Barocas, Atty, Otterbourg, New York Valerie S. Mason, Atty, Otterbourg, New York 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. 1.

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5 Drafting Standstills in Intercreditor Agreements: Balancing Rights of Junior and Senior Lienholders and Creditors Irreconcilable Differences or Happy Together? February 13, 2018

6 Panelists Michael Barocas Otterbourg P.C. New York, New York Valerie Mason Otterbourg P.C. New York, New York David Morse Otterbourg P.C. New York, New York 6

7 Introduction View of bankruptcy courts towards intercreditor agreements Once upon a time Bankruptcy courts were reluctant to look at intercreditor agreements after all, they are agreements between non-debtor parties But the world has changed This makes understanding the scope of your agreements ever more critical Markets make a difference How issues are handled vary between types of lenders Institutional term loan lenders and high yield notes Specialty lenders Sponsor affiliated lenders Other: Workouts, supplier debt, seller debt 7

8 Introduction: Categories of Intercreditor Arrangements and Elements of the Standstill Three general categories Lien Subordination Debt Subordination Unitranche The standstill is relevant to each Elements of the standstill What is it and why do you need it? First lien or senior creditor perspective Second lien or subordinated creditor perspective The scope of the standstill Duration Commencement of the standstill What happens when the standstill ends? Reinstatement and reset of the standstill 8

9 Setting the Stage: Debt Subordination Basic principle: Debt owing to one creditor (Senior Creditor) will be paid before debt owing to other creditor (Junior Creditor) regardless of source of payment Subordinated debt is subordinated in right of payment to Senior Debt Doesn t necessarily mean no payments on subordinated debt until senior debt is paid Key feature: Payment block Unsecured creditor remedies 9

10 Setting the Stage: Lien Subordination More limited than debt subordination Does not address priority in right to get paid between creditors generally Only governs priority of right to get paid from proceeds of the shared collateral Proceeds from common collateral applied to debt owing to one creditor (First Lien Creditor) before proceeds applied to debt of other creditor (Second Lien Creditor) Remedies of a secured creditor against collateral 10

11 Alternative Lien Priority Structures Common alternatives First lien/second lien: One lender or agent with a first lien on all assets or categories of assets and other lender or agent with a second lien on the same assets Split collateral: One lender or agent with a first lien on some categories of assets and the other lender or agent with a first lien on other categories of assets Split collateral: wrapping seconds Impact of split collateral structure on approach to standstill issue 11

12 Unitranche: Neither Lien Subordination nor Debt Subordination Single lien secures two tranches First Out tranche and Last Out tranche Waterfall: Priority of application of all payments typically not just proceeds of collateral triggered after certain events Single credit agreement Agreement Among Lenders ( AAL ) Remedies of a secured creditor exercised through an Agent 12

13 The Standstill or Remedies Block: What is it? Second lien creditor agrees not to exercise its remedies as a secured creditor in the case of lien subordination Subordinated creditor agrees not to exercise its remedies as an unsecured creditor in the case of debt subordination Notwithstanding that there is a default under the agreements of second lien/subordinated creditor with the common debtor Triggered by default under second lien/subordinated creditor documents not a default under first lien/senior creditor documents Not a payment block 13

14 The Remedies Block or Standstill : Why Do You Need It? What you think you know May a second lien or subordinated creditor exercise its remedies as a creditor even though there is first lien/senior debt outstanding? Even if the second lienholder/subordinated creditor gets payments from collateral or from debtor, under the UCC, is the second lienholder required to turn the payments over to the first lienholder/senior creditor? This is why the turn over provision in intercreditor agreements is so important (spoiler alert see below on what happens when the standstill ends) So what does the UCC do for the first lien creditor? Lien continues in the collateral as sold by second lien creditor Does the first lien lender really want to sue to repossess its collateral in the possession of some transferee or to sue for conversion? 14

15 First Lien Lender/Senior Creditor Perspective: It s All About Expectations The Enforcement Priority : First lien lender/senior creditor has exclusive right to control timing, method and manner of enforcement of remedies Standstill by second lien/subordinated creditor is the necessary corollary Avoid second lien/subordinated creditor having ability to exercise remedies as basis to obtain rights or payments Practical issues of two lenders enforcing at same time 15

16 Second Lien Lender/Junior Creditor Perspective: It s All About Expectations Nature of product and risk/reward Expertise, resources and costs Institutional investor Specialty lender Practical issues Alignment of interests with first lien/senior creditor Time frame for information gathering and planning Relationship with first lien/senior creditor Two lenders exercising remedies Split collateral versus first lien/second lien 16

17 Second Lien Lender/Junior Creditor Perspective: It s All About Expectations The dilemma of the second lien/subordinated creditor The melting ice cube or The time for a turnaround And--who has the risk? Key factors for the second lien/subordinated creditor Practical issues The buy-out option Carve-outs from the standstill The time limit on the standstill 17

18 The Scope of the Standstill: Lien Subordination Limit on action by second lien lender against collateral only or any action to collect? Types of limitations Right of setoff or notification of account debtors Rights under control agreements, collateral access agreements, etc. Commence or join with any person in commencing any action against the collateral, including foreclosure 18

19 The Scope of the Standstill: Limit on Right to Contest Enforcement Not just standstill in exercising its enforcement rights but also agree not to contest enforcement by first lien lender For example, second lien lender agrees: No right to object to forbearance by first lien lender No right to object or contest any foreclosure action or other enforcement or exercise by first lien lender of any rights or remedies (so long as the second lien attaches to proceeds and such actions or proceedings are being pursued in good faith) No objection to the manner in which first lien lender may seek to enforce or collect its debt or liens No right to assert marshalling, appraisal, valuation or other similar right 19

20 Scope of the Standstill: Debt Subordination and Unitranche Debt subordination: Prohibition on exercise of any rights or remedies or any action to collect or enforce junior debt until senior debt is paid in full In re Erickson Retirement Communities, Bankr. N.D. Tex Carve-outs Unitranche Only one lien Directions by Required First Out Lenders to Agent Directions by Required Last Out Lenders to Agent Limitations on enforcement by one lender Collective action cases 20

21 Scope of the Standstill: Permitted Actions During Standstill Period Common carve-outs from standstill File a claim or statement of interest with respect to its debt in a bankruptcy Take action to create or perfect (but not enforce) its second lien File any necessary responsive or defensive pleadings to oppose motion that objects to or seeks to disallow second lien claims Join but not commence an enforcement action Are these really necessary to say? (Depends on scope of standstill) 21

22 Scope of the Standstill: Other Permitted Actions During Standstill Period Commencement of involuntary bankruptcy case Consequences to first lien lender Notice Waiting period Commencement of litigation (but not enforce judgment) Filings in bankruptcy and voting claims File any pleadings which assert rights or interests available to unsecured creditors (to the extent not inconsistent with agreement) 22

23 The Standstill: Duration--Lien Subordination The Silent Second : Standstill until first lien debt paid in full Split collateral versus first lien/second lien First lien lender perspective Second lien lender perspective Basis for determining duration: What is objective of the standstill? Most common factors: Complexity of business Appraisal scenario Seasonality Tolling of Standstill Period 23

24 The Standstill: Duration The Anomaly of Unitranche Origins of unitranche Relationship to voting rights and the use of class voting First out lender standstill So long as no notice of exercise of buy-out option by last out lender Short time period Exception for exigent circumstances Last out lender standstill So long as no first out lender direction to Agent Longer time period than first out lender standstill period 24

25 The Standstill: Duration Debt Subordination Typical payment block structure No payment made or required to be made in respect of subordinated debt after notice of payment default from senior creditor No payment made or required to be made in respect of subordinated debt for a period of 180 days after notice of non-payment default from senior creditor Is there a default under the subordinated debt documents to trigger a standstill period? Standstill Payment default, then until senior debt paid in full Non-payment default, until end of blockage period 25

26 Standstill: Triggering Event Standstill period is triggered by default under second lien lender documents Should any default under second lien lender documents give right to start time period? How do you determine a material default? Use of financial covenants/misrepresentations Payment default Default plus acceleration Default Plus : Not perfect but mitigates risk to first lien lender 26

27 Standstill: Triggering Events-- Unitranche First out lender standstill Standstill period commences on notice by Required First Out Lenders to Agent upon Event of Default directing enforcement action Other options Commencement of insolvency proceedings Payment default Acceleration of any Obligations Breach of financial covenant Last out lender standstill Standstill period commences on notice by Required Last Out Lenders upon Event of Default directing enforcement action Same other options So long as no notice received from Required First Out Lenders 27

28 What Happens When Standstill Period Ends? What if before the end of the Standstill Period the first lien lender starts exercising remedies against the debtor or collateral? The Back-End Standstill: Standstill Period gets extended Criteria for receiving benefit of Back-End Standstill: First lien lender is diligently pursuing in good faith exercise of enforcement rights Against all or material portion of the collateral Back-End Standstill as to particular assets versus material portion 28

29 Qualifying Actions for Back-End Standstill Defining Enforcement Actions Enforcement actions to trigger Back-End Standstill Solicitation of bids from third parties to conduct the liquidation of all or material portion collateral Engagement of sales brokers, marketing agents, investment bankers, accountants, auctioneers or other third parties for purpose of valuing or marketing collateral Initiation of action to take possession of all or material portion of collateral Commencement of legal proceedings against or with respect to all or material portion of collateral Special provisions for an asset-based facility: 29

30 Reinstatement and Reset of Standstill Period What if default is cured or waived? Notice to commence standstill deemed rescinded No Standstill Period deemed to have commenced What if after end of Standstill Period, second lien lender does not take any action within some time after end of Standstill Period? Notice to commence standstill deemed rescinded No Standstill Period deemed to have commenced Notice from second lien lender of intent to act 30

31 What Happens When Standstill Period Ends? Takeover and Turnover Can first lien lender take over remedies after second lien lender has started? Turnover provisions Description Relationship to UCC Applicability after end of standstill when second lien lender is enforcing 31

32 The End 32