Our four major domestic banks, led by Westpac, have launched an initiative to develop a set of ‘standard’ intercreditor principles for the Australian leveraged finance market. The Mallesons team was asked to draft the principles on behalf of the four banks, with input provided also by Corrs Chambers Westgarth. In transactions where the capital structure contemplates different layers of debt - senior debt, subordinated/mezzanine institutional debt and/or subordinated retail notes, intercreditor principles are essential in regulating the rights between the various stakeholders.
Without a broadly accepted standard, intercreditor negotiations have proceeded in a somewhat ad hoc fashion, with the starting position largely driven by the template of the law firm which happened to have carriage of the drafting. The hope is that going forward, with at least a standard starting position, parties can focus directly on the key commercial items.
Some of the key features of the principles are briefly examined below.
Lock-Up on Subordinated Debt: The general rule is that Senior Lenders can block payments in certain circumstances eg where there is a Senior Debt payment default, breach of an interest suspension covenant (usually based on the Debt Service Cover Ratio) or issue of stop notices in cases of Senior defaults. For stop notices, the usual blockage period is 180 days. Once a lock-up ceases, payments of catch-up interest is permitted ahead of the Excess Cashflow sweep to the extent it does not cause a financial covenant breach.
Amendments and waivers: Senior Lenders have greater scope to amend Senior Debt documents eg to effect pricing increases up to a cap or changes to the repayment profile, financial covenants provided it is not more onerous on the Borrower. This also allows for a greater flexibility to implement restructures and workouts.
Drag-along rights: In Australia, Senior Lenders usually have the ability to drag Subordinated Lenders along on waivers with certain exceptions on CPs and major undertakings eg negative pledge, debt incurrence, change of control, etc. This position has been maintained, but will be made consistent with the permitted scope for amendments mentioned above.
Refinancing and raising additional Senior Debt: The traditional position in Australia is that Senior Debt can be refinanced and/or additional Senior Debt raised up to an agreed headroom. As part of this process, Senior Lenders would also like the ability to reset financial covenants and lock-up levels within certain parameters.
Acceleration vs enforcement: Historically, some transactions in Australia have distinguished between acceleration and enforcement rights for Subordinated Lenders, with the standstill for acceleration being shorter than the standstill on enforcement. However, there are doubts as to whether this distinction provides any practical comfort to Senior Lenders. This is because acceleration by Subordinated Lenders would cause the Subordinated Debt to become due and payable, which in turn, is likely to cause directors to tip the company into voluntary administration due to concerns about potential personal liability under Australia’s onerous insolvent trading laws. Accordingly, it is proposed that acceleration and enforcement should be treated the same and be subject to similar restrictions.
Enforcement: Generally, Subordinated Lenders can only direct the Security Trustee to enforce in limited circumstances eg Senior Debt is accelerated, Subordinated Debt is not repaid on its maturity date (which is 6 months after Senior maturity) or a standstill period has elapsed after a Subordinated Event of Default. Enforcement rights after a set 180 day standstill period was seen in the large transactions before the global financial crisis (GFC). Post-GFC standstill periods have varied between 180 - 360 days depending on the type of default and where leverage levels are at. Once enforcement action commences, Senior Lenders control the process.
Feedback is currently being sought from all key participants in the Australian leveraged finance market. The aim is to produce a set of basic principles which can be used as a starting point for negotiations in leveraged finance deals going forward. The ultimate aim would be the creation of a full intercreditor document under the umbrella of the Asia-Pacific Loan Market Association (APLMA).