LMA Webinar Introduction to the LMA Leveraged Intercreditor Agreement Toby Mann, Senior PSL Clifford Chance

LMA Webinar Introduction to the LMA Leveraged Intercreditor Agreement Toby Mann, Senior PSL Clifford Chance

Introduction Drafting assumptions Structure and key terms of the LMA Leveraged Intercreditor Agreement 2

Drafting basis Why have an intercreditor agreement on a transaction? Different levels of debt Reflect commercial deal that some levels of debt are intended to have priority over others Regulate security package Has to reflect the debt structure Designed for use in conjunction with the LMA Leveraged Primary Document First issued 2009; significant update 2012 3

Drafting basis (cont d) Similar assumptions to those made in the Leveraged Primary Document English law Members of the Group are all English companies Same debt structure Starting point only 4

Assumed structure Investors Vendor Equity Investment by way of Loan Notes Vendor Note (deferred Purchase Price) Parent Equity Investment by way of subscription for Shares of Parent (including Preference Shares) Subscription for shares of Company (downstreaming equity investment) and Structural Intra Group Loan (downstreaming equity investment) Mezzanine Lenders Mezzanine Loan Company (Purchaser) Senior Loan (Term Facilities A, B and C plus Revolver) Senior Lenders Intra-Group loans Target Intra-Group loans Hedge Counterparties Subsidiary 1 Subsidiary 2 Subsidiary 3 5

Assumed structure (cont d) Senior term and working capital revolving facilities (includes provision of Ancillary Facilities and Letters of Credit) Interest rate and exchange rate hedging liabilities relating to the Senior Facilities and, potentially, the Mezzanine Facility Mezzanine Facility Intra-Group debt Structural Parent debt 6

Assumed structure (cont d) Vendor Notes (optional) Investor debt Loan Notes and Short Term Loans (optional) 7

Anatomy and key terms Section 1: Interpretation Section 2: Ranking and Primary Creditors Section 3: Other Creditors Section 4: Insolvency, Turnover and Enforcement Section 5: Non-Distressed Disposals, Distressed Disposals and Claims Section 6: Proceeds and Qualifying Senior Facilities Refinancing Section 7: The Parties Section 8: Additional Payment Obligations Section 9: Administration Section 10: Governing Law and Enforcement 8

Section 2 Ranking and primary creditors Ranking of debt (Clause 2, Clause 10, Clause 18) Secured debt Senior Facilities and Hedging Liabilities (rank first and pari passu) Mezzanine Facility (ranks second) Unsecured debt Intercompany debt Structural Parent debt Vendor Notes (if included) Investor Loan Notes and Short Term Loans (if included) 9

Section 2 Ranking and primary creditors (cont d) Controls on Senior Lenders (Clause 3) Size (Clause 3.3(a), (d), (e), (f)) Senior Headroom Margin (Clause 3.3(b)) Senior Yield Headroom Fees (Clause 3.3(c)) Senior Yield Headroom Amendments and waivers Flex rights Increased payments (Clause 3.3(h)) 10

Section 2 Ranking and primary creditors (cont d) Hedge Counterparties (Clause 4) Identity and number (Definition of Hedge Counterparty ) Type of hedging (Definition of Hedging Agreement ) How much hedging? (Clause 4.13) Payments (Clauses 4.2 and 4.3) Scheduled payments (Clause 4.3(a)(i)) Tax gross-up / costs and expenses (Clause 4.3(a)(ii)) Close-outs (Clause 4.3(a)(iii), (iv)) Hedge Counterparty Insolvency/Force Majeure (Clause 4.3(a)(v)) 11

Section 2 Ranking and primary creditors (cont d) Enforcement Action (Clauses 4.8 and 4.9) Non-Credit Related Close-Out (Clause 4.9(a)) Reducing hedging Illegality, Tax Event, Tax Event upon Merger, Force Majeure Credit Related Close-Out (Clause 4.9(a)) Distress Event Non-Payment Insolvency Refinancing of Senior Facilities Nuisance right to sue (Clause 4.9(b)) Voting (Definition of Senior Credit Participation ) 12

Section 2 Ranking and primary creditors (cont d) Mezzanine lenders (Clause 5) Payments (Clauses 5.1 to 5.6) No payment of principal allowed (Clause 5.2(a)) Illegality Right of cancellation/repayment in relation to a single lender Mandatory prepayments after Senior Facilities repaid Others (Clause 5.2(a)) 13

Section 2 Ranking and primary creditors (cont d) Payment Stop Automatic on Senior Payment Default (Clause 5.2(a)(i)(C)) Other Mezzanine Payment Stop Event (Clause 5.2(a)(i)(B) and Clause 5.3) Any Event of Default? Event of Default which Majority Senior Creditors consider material? Specified Events of Default only? Adviser costs (Clause 5.2(a)(iii)) 14

Section 2 Ranking and primary creditors (cont d) Amendments (Clause 5.8) size (Clause 5.8(b)(i)) repayment schedule (Clause 5.8(b)(ii)) interest and fees (Clause 5.8(b)(iii)) additional payments (Clause 5.8(b)(iv)) more onerous obligations under commercial provisions (Clause 5.8(b)(v)) 15

Section 2 Ranking and primary creditors (cont d) Security (Clause 5.10) No Enforcement Action (Clause 5.11 and 5.12) Mezzanine Standstill Period (Clause 5.12(a)(ii)) May match Seniors (Clause 5.12(a)(i)) Mezzanine option to purchase Senior Facilities (Clause 5.14) NB: Mezzanine community perspective 16

Section 3 Other creditors Intra-Group Lenders, Parent, Vendor and Investors Generally heavily restricted in terms of payments, amendments, security and enforcement Payments of Intra-Group debt permitted until Event of Default/Acceleration NB: Borrower perspective Intra-Group provisions very restrictive 17

Section 4 Insolvency, turnover and enforcement Turnover (Clause 10) Creditors pay recoveries to the Security Agent, which distributes them according to the ranking When? not a permitted payment (Clause 10.2(a)) after any acceleration or any enforcement (Clause 10.2(c)) after insolvency (Clause 10.2(e)) 18

Section 4 Insolvency, turnover and enforcement (cont d) Insolvency (Clause 9) Game over. New rules apply All levels of Creditors may enforce their rights NB Security Agent can co-ordinate Receipts subject to turnover Why? 19

Section 4 Insolvency, turnover and enforcement (cont d) Enforcement of Transaction Security (Clause 12) Single security package held by Security Agent for the Primary Creditors Distinction between commencing and manner Senior Lenders/Hedge Counterparties generally in charge Mezzanine right to commence Senior Lenders/Hedge Counterparties have the right to take over the enforcement process at any time 20

Section 5 Non-distressed disposals, distressed disposals and claims Distressed Disposal (Clause 14) Disposal in an enforcement scenario Release of relevant Transaction Security and the release and/or disposal of liabilities on a share sale (Clause 14.1) Value protection (Clause 14.4) Increasingly a flashpoint in negotiations 21

Section 6 Proceeds and qualifying senior facilities refinancing Equalisation (Clause 19) Provides for balancing payments between Senior Lenders and Hedge Counterparties following enforcement When? Operates pro rata to outstandings not commitments Optional clause depends on deal structure/commercial agreement 22

Speaker contact details Toby Mann Senior PSL, Clifford Chance +44(0)20 7006 8864 toby.mann@cliffordchance.com 23