Waterfall in Credit Agreement

Lenders and borrowers approving recent seed and stacking operations have used a provision that allows the borrower to purchase and withdraw loans on the open market. The open market purchase disposition is an exception to the sacred pro-rata right (however phrased) found in most mid-market loans today. What exactly constitutes an open market purchase and whether it includes the exchange of cashless receivables offered only to certain lenders as part of restructuring operations is one of the main points of contention at Serta, Boardriders and their ilk. But whatever the exact limitations of this provision, these and other similar cases serve to remind lenders that mid-market lending arrangements today contain more technology (successful in the syndicated and high-yield bond markets where they appeared) that offers flexibility to the borrower – provisions such as refinancing facilities, debt swapping, modification and renewal, buybacks of discounted loans and purchases on the free market – so little. as at any other time in the past. The use of these provisions does not require the approval of lenders, and their pervasiveness significantly limits the list of unusual price transactions that are useful in restructurings that require the consent of the required lenders or all lenders. To question our nomenclature, the standard definition is not the most common definition of the lenders required in our studied club deals. Nearly 60% of these credit agreements include a definition of required lenders that requires the consent of at least two unaffiliated lenders (if there are at least two) to approve an action (the “definition of two or more”). The definition of “two or more” is often used when the second lender has an equity size of 30% or more. This group includes businesses that have slight deviations from the definition of two or more, e.B. that at least two lenders are required as long as there are no more than four unrelated lenders, or that at least two lenders are required as long as there are two or more unrelated lenders, each holding at least a minimum proportion of loans and bonds. At the heart of BLB`s submissions was the argument that it was economically reasonable and appropriate for all amounts paid by borrowers or guarantors to come primarily in their favour compared to other lenders, without BLB having such amounts in accordance with the penultimate sentence of Article 9.7. Having entered into its own hedging arrangements to manage its exposure to swaps, BLB sought to argue that the “breach of coverage costs” in clause 9.7(a) would include its costs and expenses for restructuring or rebalancing those swap agreements in the event of early termination of borrowers` collateral arrangements.

BLB also argued that, according to the penultimate sentence of clause 9.7, the reimbursement of those costs and expenses would be above the principal and interest due to lenders under the Facility Agreement. For example, suppose John has three credit cards: Card A, Card B, and Card C. The interest rates on the cards are 20%, 12% and 10% respectively. John wants to get rid of credit card debt, so he decides to pay off the highest interest card first. The minimum monthly payments on the cards are $150, $100 and $75, respectively. John makes cascading payments. First, it pays the minimum for each card each month ($325 in total), and then sends an additional $800 to the A card. When Card A is finally paid, he cuts it and then applies the extra $800 per month, plus the $150 monthly payment he used to send to Card A (total $950) to Card B. When Card B is paid, John applies the additional payments of $800 plus the minimum payment of $250 he sent to Cards A and B ($1,050 in total) to Card C until it is paid.

The observations contained in this article are generally based on the collective experience of proskauer Private Credit Group and in particular on a recent in-depth review of approximately 50 representative loans to SMEs (out of the more than 600 active loans in our database) for the data points mentioned here and the related interlender provisions. For any lender that is not a necessary part of a vote of the required lenders, the relative strength or weakness of the so-called “sacred rights” – those few categories of credit document changes that require the consent of all lenders or all lenders harmed by them – are of particular importance as they represent the last line of defense against transactions made by the required lenders and the borrower without the consent of Minority lenders. The Loan Syndications and Trading Association (LSTA) loan agreement establishes the market basis for sacred rights, which can be summarized as a protection of minority lenders` right to the basic economic terms of their loans (including principal, interest rate, payment dates, prorated share, and relative position in the cascade) and the voting rights they receive at closing. .