USA Trends and Developments Contributed by: Meyer C. Dworkin, James A. Florack, Vanessa L. Jackson and Kenneth J. Steinberg, Davis Polk & Wardwell LLP
Double-dip and pari plus facilities A more recent innovative form of liability manage- ment transaction is the “double-dip” facility. Under this structure, borrowers provide (new) lenders with both (i) a lien on the collateral that secures the financ- ing provided by existing lenders, on a pari passu basis with that existing financing and (ii) a lien on an inter- company claim against the loan parties that benefits from the same package. The typical approach for achieving this result is for (new) lenders to provide financing to an unrestricted subsidiary (an SPV) that, in turn, utilises the borrowings to make an intercom- pany loan to the borrower, which is secured on a pari passu basis with the existing facility. The double dip arises from the combination of (i) the SPV pledging the secured intercompany loan to the (new) lenders as collateral for the new loan and (ii) the borrower and other loan parties to the existing facility separately providing a guarantee of the SPV loan secured by the credit agreement collateral. Each of the direct guar- antees and intercompany claims provides the lenders with separate sources of recovery from the loan par- ties and collateral, which is particularly powerful in a bankruptcy proceeding. While the double claim – and potential double recovery – resulting from a double- dip financing has not been tested by any published bankruptcy court decision, lenders under a double dip should have the right to file two independent proofs of claim, thereby potentially doubling their recovery against the debtors. For the avoidance of doubt, such recovery would not be expected to exceed 100% of the lenders’ claim. A further recent enhancement of the double-dip struc- ture is referred to as the “pari plus”, in which the SPV’s obligations to the (new) lenders are further supported by guarantees and collateral from subsidiaries – such as foreign subsidiaries – that do not otherwise guaran- tee the existing facility and are, therefore, incremental to (“plus”) the credit support applicable to the existing facility and its lenders. The SPV’s credit profile may be further enhanced through a drop-down of assets from the restricted group, illustrating the way in which par- ties will mix and match elements from different struc- tures with the goal of achieving the optimal combina- tion of benefits.
ness – often intellectual property – and transfer these assets to a subsidiary (most commonly an unrestricted subsidiary, which is a subsidiary of the borrower that is not subject to the covenants under a credit facility and, as a result, does not provide any credit support to the lenders) that does not provide credit support to the existing loans (“NewCo”). Upon transfer to NewCo, the transferred assets are automatically released from the existing collateral package and freely available to secure new indebtedness at NewCo. Drop-down financings often also include similar roll-up features permitting the lenders to exchange a portion of their existing loans at a discount to par for the new structur- ally senior (since the debt is at a subsidiary that does not guarantee the credit facility obligations) NewCo debt. The financing incurred by NewCo, when struc- tured as an unrestricted subsidiary, is not subject to any limitations under the existing loan documentation, and the claims of the new creditors against NewCo and the transferred assets are structurally senior to any claims of the existing lenders on such assets. A twist on this structure utilised a non-guarantor restricted subsidiary instead of an unrestricted subsid- iary as the NewCo into which the intellectual property was transferred and the new debt incurred. A “non- guarantor restricted subsidiary” is a subsidiary of the borrower that is subject to the credit facility covenants but is not required to guarantee or otherwise pledge its assets as collateral for the facility. The most typi- cal example is a “foreign subsidiary”, which in some cases may include a US-organised subsidiary that is itself a subsidiary of a non-US subsidiary of the bor- rower. The choice between a non-guarantor restricted subsidiary or an unrestricted subsidiary as the NewCo will be driven primarily by investment and indebted- ness capacity in the existing loan documentation, as there are generally fewer restrictions on transfers of assets to non-guarantor restricted subsidiaries (than to unrestricted subsidiaries), but greater limitations on their ability to incur and secure new financing. In con- nection with structuring a drop-down financing with non-guarantor restricted subsidiaries, it is also critical to analyse the “further assurance” provisions of the credit facility to ensure that the applicable subsidiaries are, in fact, carved out from the guarantee and collat- eral requirements after giving effect to the incurrence of the financing.
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