USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
acquisition closing (either marketing periods or an “inside date”). Given these dynamics, it is customary for buyers/bor- rowers and arrangers to execute commitment letters, including detailed term sheets that usually include the parties agreeing on precedent documentation, simul- taneously with signing the acquisition agreement. This provides buyers with committed financing, subject to Recently, some borrowers facing adverse economic conditions have looked to execute liability manage- ment transactions (LMT). The market has also seen a rise in litigation and creditor-on-creditor conflicts arising from aggressive LMT exercises, prompting further evolution in drafting and negotiation of credit agreements. One example of such a transaction involves a bor- rower seeking the release of guarantors that are no longer wholly owned by the borrower (even if wholly owned by its other affiliates). Following such release, the released entities would more easily be able to incur additional indebtedness. Lenders have increas- ingly sought protection from this type of transaction by permitting the release of a guaranty only in certain circumstances (eg, the guarantor becomes non-whol- ly owned in a bona fide transaction involving a third party without the intent of releasing the guaranty as part of the transaction). this customary “limited conditionality”. 3.9 Recent Legal and Commercial Developments Another example is the use of multiple-step process- es (where each step is permitted under the invest- ment and disposition covenants) to move valuable IP and other assets from guarantors to non-guarantor entities, thereby automatically releasing the lenders’ security interest in such assets in the process. Lend- ers have, similarly, sought to limit or even completely eliminate this flexibility. Borrowers have also increasingly used the amend- ment section to make updates to credit documenta- tion to benefit majority lenders over minority lenders, such as allowing majority lenders subordinate existing debt in both right of payment and on the liens, for new
debt which they provide. In response, lenders are now tightening amendment provisions to require any prim- ing debt to be offered to all lenders pro rata. Lenders are focused on the “pro rata sharing” provisions as well as enhanced protections for minority lenders. Some borrowers have also raised new secured debt outside the existing credit group, which is on-lent into the credit group on a secured basis, and is secured and guaranteed both by the existing credit group (on a pari passu basis with the existing debt), giving new lenders two secured claims against the existing credit group and increasing their pro rata share of potential recovery proceeds vis-à-vis the existing creditors. Lenders are pushing for stricter limits or bans on unrestricted subsidiaries holding debt or liens on any property of the borrower and the restricted group to prevent dilution of recovery in a distressed scenario. Additionally, lenders are concerned about value leak- age from the credit group through investments in unre- stricted subsidiaries. Borrowers have moved valuable assets outside the reach of existing lenders to incur new, structurally senior debt secured by those assets and thereby undermining the collateral and credit sup- port available to the original lender group. To address this, lenders are demanding tighter controls on invest- ments in unrestricted subsidiaries, such as requiring such investments be made solely through specific baskets, prohibitions on the reallocation or reclassifi- cation of investment capacity to unrestricted subsidi- aries, and aggregate caps on the value of assets that Nationally chartered banks may not charge interest exceeding the greater of (i) the rate permitted by the state in which the bank is located or (ii) 1% above the discount rate on 90-day commercial paper in effect in the bank’s Federal Reserve district. If the state where the bank is located does not pro- hibit usurious interest, banks may not charge interest exceeding the greater of 7% or 1% above the dis- count rate on 90-day commercial paper in effect in the bank’s Federal Reserve district. In general, federal law will pre-empt any state usury law that prohibits state- can be transferred. 3.10 Usury Laws
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