In November 2013 the Loan Market Association (LMA) published two new documents (plus associated user guides) for use in leveraged finance transactions. The LMA recommends them for use where the financing comprises a super senior revolving facility, secured hedging and senior secured notes provided under a typical New York law governed indenture.
- a super senior multicurrency revolving facility agreement (the Super Senior RCF); and
- an intercreditor agreement (which seeks to regulate the position between the bank and hedging creditors and senior secured bondholders) (the Super Senior Intercreditor Agreement),
(together the LMA Super Senior Documents).
Publication of these documents is testament to the fact that secured bank and high-yield secured bond deals have become an increasingly popular financing alternative.
In the leveraged financing arena, before the credit crisis, bank lending was king. Bank lenders would commonly provide financing directly to the company acquiring the target. However, a holding company of the acquiring company would usually issue high-yield bonds, thus ensuring the bondholders would take a structurally subordinated position.
The onset of the financial crisis changed all this. Banks reined in their lending and borrowers became understandably concerned about how easily they could refinance their bank debt.
This played into the hands of the capital markets. High-yield bond debt offered an interesting alternative. Corporates started to look to a combination of bank debt and high-yield bonds to finance (and refinance) their activities. Some used high-yield bond issues to refinance portions of their bank debt, while more significantly, others started to use secured high-yield bonds to refinance their entire debt. The bank lenders would provide only a working capital facility (the "super senior revolving credit facility") which would sit alongside the high-yield bonds. A common security package would benefit both the bank lenders and the high-yield bondholders as well as any permitted hedging liabilities.
The intercreditor position
Understandably, this new financing structure led to much focus on the intercreditor position. No finance provider ever wants to find itself out in the cold on a borrower's default. So, the intercreditor agreement is always fiercely negotiated in any financing transaction. The key issue is control. Who has a seat at the restructuring table? Who is best placed to determine what is best for the creditor group? Who has the ability to control the decision to take enforcement action and the most suitable manner and method of enforcement? In the early days of these "super senior" transactions, there was no settled market position, leaving much up for grabs.
The Super Senior Intercreditor Agreement
It is fair to say that, when the LMA published the Super Senior Intercreditor Agreement, various intercreditor positions had become more accepted in the market. The Super Senior Intercreditor Agreement therefore makes various assumptions. For example:
- The "super senior" bank debt and the bonds will rank pari passu as regards payment and the common security package.
- The payment waterfall will give "super senior" bank lenders priority in relation to the proceeds of disposal of enforcement of security.
- The security agent is (or is related to) a member of one of the lending syndicates.
- Prescribed enforcement principles will apply to enforcing security to ensure achievement of an overriding enforcement objective (usually to maximise recovery in a prompt and expeditious way). The enforcement principles include (among other things) the need for proceeds of enforcement to be cash until the "super senior" creditors are discharged in full. In most circumstances, a financial adviser should provide a "fairness opinion" on the proposed enforcement, unless there is a sale through public auction. However, this does not apply to enforcement of security over shares in group companies.
However, equally, the LMA recognises that it is impossible to produce an intercreditor agreement which is "standard" for all these types of transaction. The transaction could deviate from that assumed by the LMA Super Senior Documents, and commonly the parties will want to negotiate alternative positions. Also, if the parties decide to appoint an independent, third party security agent, that security agent will closely scrutinise the enforcement process to ensure there is clarity on when (and how) it should act.
In the areas where it seems most likely that different positions could emerge the Super Senior Intercreditor Agreement suggests various drafting choices. For example:
- Will the agreement prevent the borrower paying under the bonds and/or bank debt and, if so, on what trigger events?
- When looking at the creditor voting groups, what percentages of the relevant total debt will dictate majorities?
- In what circumstances can hedging counterparties take part in voting?
Finally, there are certain positions currently assumed in the Super Senior Intercreditor Agreement, which seem likely to form the basis of further negotiation anyway:
- Who will keep control of enforcement and in what circumstances? Should the creditor voting threshold change over time so one creditor group would control for a specified period?
- How should the votes of separate classes be counted? Is it right that, say, a decision taken by 20 per cent of the bondholders will count as 100 per cent of the bonds when considering intercreditor decisions?
- Are the enforcement mechanics workable in practice? Any security agent will need to understand when it must act, and what it should do in the face of competing (and conflicting) instructions. No security agent will be comfortable taking enforcement action which is "in the best interests" of the secured creditors as a whole, bearing in mind their diverse interests.
- How can the secured creditors best control the incurrence of future (secured) indebtedness which will dilute their positions?
- Are the various consent levels required for amendment of the Super Senior Intercreditor Agreement and the underlying debt documents acceptable to the parties?
In reality, it is too early to say how "super" the LMA Super Senior Documents are. The structure is still relatively new, so it seems certain that practices and documents will evolve further. However, anything which can present a documentary starting point will save time and money for all concerned. At the least, it should ensure that creditors (and their lawyers) spend time negotiating matters of real commercial concern, rather than boilerplate clauses.
Law stated as at 5 December 2013.