FLT is launching a new course – Introduction to Interceditor Agreements – the first in a series exploring these critical agreements. To celebrate this exciting news, our founder, Sabrina Fox, hosted a live Office Hours event last week to discuss some of the topics covered in the course. A blog summarizing these points is below.
Intercreditor agreements (ICAs) are crucial documents in financial transactions where multiple creditors are involved. These agreements dictate the interaction and priorities among the various creditors, ensuring that the rights of both senior and junior creditors are protected. When entering into an ICA, whether you're a lender or a legal advisor, understanding the key provisions and strategies is essential for successful negotiations.
Understanding Your Position
The first step in any ICA negotiation is identifying your position within the capital structure. This will significantly influence your priorities and the steps you need to take. Are you a senior creditor seeking to control enforcement? Or a junior creditor trying to secure negotiation rights to purchase and guardrails around public auctions?
Key Provisions to Consider
- Payment Waterfall: The distribution of proceeds waterfall from enforcement should mirror the capital structure. Ensuring this alignment prevents conflicts and ensures that everyone knows their place in the pecking order. For example, if the parties agree that proceeds go first to the RCF, then term loan and SSNs pro rata, it’s important that all related documentation mirrors this order to avoid any future disputes.
- Payment Blockages and Standstill Periods: Payment blockages and standstill periods operate to enforce order while the process advances. Junior creditors will focus on the terms of these provisions, for example, the length of time of any standstill, while senior creditors will want to maintaining control over enforcement processes.
- Rights After Default: Post-default scenarios necessitate clear understanding and negotiation of rights. Questions such as "Who controls enforcement and at what point?" and "Is there an option to purchase senior debt, and under what conditions?" need definitive answers within the agreement.
Drafting Strategies for Legal Advisors
Legal advisors drafting ICAs will ensure compatibility between the ICA and other financial documents, such as the Senior Facilities Agreement (SFA). Critical areas include:
- Loan Market Association (LMA) Standards vs. New York Standards: The ICA will either follow LMA or New York standards, or may blend them for international deals. For instance, LMA-based release provisions may not apply in a New York context due to Chapter 11 mechanics.
- Avoiding Conflicts Between Documents: When reflecting covenants from the SFA, legal counsel should ensure the ICA does not impose extra liabilities or restrictive conditions that could impede the terms agreed upon in the SFA.
- Crucial Concerns for Junior Creditors: Junior creditors need to be vigilant about several critical areas:
- Sale Processes: Ensuring that the fairness of asset sales, whether through fair sale opinions or public auctions, is reflected transparently is paramount.Junior creditors should insist on clear terms about who can participate, how the process is conducted, and under what advisement.
- Consultation Rights: Throughout the enforcement process, particularly when assets are subject to an auction process, maintaining robust information and consultation rights is essential. This ensures junior creditors are kept in the loop and are aware of relevant decisions.
- Option to Purchase: For junior creditors, the option to purchase senior debt can be a valuable tool. This provision allows junior creditors to take control of the credit in distress scenarios, aligning interests and potentially enhancing recovery prospects. Important considerations include:
- Triggers for the option (e.g., senior loan acceleration, insolvency proceedings).
- Pricing mechanisms(preferably at market value rather than par).
- Timing of the option activation (early stages of distress vs. post-acceleration).
Conclusion
ICAs are complex documents that require meticulous attention to detail and strategic foresight. Whether you're a lender or a legal advisor, understanding your role, focusing on key provisions, and ensuring robust drafting by advisers will lead to more effective and efficient financial transactions.
The ultimate goal is to create comprehensive and resilient agreements that safeguard the interests of all involved parties, paving the way for smooth enforcement and equitable resolutions in times of distress.
This week we launch our Introduction to Intercreditor Agreements course, the first of a new module on Intercreditor Agreements, to keep our clients at the cutting edge of market developments. You can read the full course outline here.
Now is a great time to sign up with Fox Legal Training – in addition to the market headwinds, we are running our best ever hybrid learning Back to School offer. Click here to find out more.
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- Sabrina Fox