USA Trends and Developments Contributed by: Meyer C. Dworkin, James A. Florack, Vanessa L. Jackson and Kenneth J. Steinberg, Davis Polk & Wardwell LLP
A supplemental approach to protection: the co-op agreement Likely the most important development over the past year has been the increasing prevalence of co-oper- ation (“co-op”) agreements amongst lenders intended to protect their loan positions from coercive transac- tions between the borrower and other (majority) lend- ers. Co-op agreements provide, in general, that no lender party will seek or agree to effectuate a liability management or similar transaction with the applica- ble borrower without providing such opportunity to the other lender parties. These arrangements may be used to enhance the defensive protections noted above, including not only through agreements to vote similarly when presented with a potentially coercive amendment, but also to refrain from side deals with the borrower or other creditors that would afford a particular co-op party an advantage over others. To maximise their effectiveness, lenders seek to enter into these arrangements early in a loan’s life cycle, well in advance of any actual distress, and to require that the obligations travel with the loan in any sub- sequent assignment or transfer. Although co-op agreements are most often viewed as an important defensive measure to avoid being on the wrong side of a required-lender amendment, given the evolution of so-called lender-on-lender violence, co-op agree- ments may also facilitate first-mover actions by the agreeing group. Borrowers have sought to include express language prohibiting (or, at least, materially limiting the effectiveness of) such co-op agreements in recent loan documentation and have also raised questions about the enforceability and possibly even the legality of such arrangements. Looking forward – a continually evolving dynamic Borrowers and lenders continue to evaluate and implement new variations on existing themes of lia- bility management transactions. Weighed against the competitive backdrop of preserving existing portfo- lio investments and existing positions in the capital structure, participants in the leveraged finance mar- ket have come to recognise that liability management exercises can be a valuable tool for managing and protecting capital. As lender protections have evolved, so too have the structures for achieving these results, in many cases frustrating many once-fundamental expectations of lenders in the secured loan markets.
and collateral without the vote of all affected lenders. Consequently, many market participants were sur- prised that “uptiering transactions” – resulting in new lenders having contractually senior claims against existing credit parties that effectively extinguished the value of the collateral and guarantees provided to the existing lenders– could be effected with only a major- ity lender vote. Lenders have increasingly required, in response, that any subordination of lien priority on all or substantially all collateral require an “all-affected” lender vote, subject, in certain cases, to exceptions to such requirement for: • debtor-in-possession (DIP) facilities or use of cash collateral in a bankruptcy proceeding of the bor- rower; • indebtedness “otherwise permitted” by the credit agreement as in effect at closing (eg, capital leas- es, securitisations or receivables facilities); and/or • priming senior indebtedness to the extent all exist- ing lenders were given a pro rata opportunity to participate (preferably, from the lender perspective, on the same terms and conditions). Release of guarantees Subsidiaries of borrowers are generally released from their guarantee obligations upon ceasing to be wholly owned by the borrower. This permits borrowers, in practice, to trigger the release of guarantees (and col- lateral obligations) of valuable subsidiaries by selling or distributing minority interests in the entities. This release mechanism has been an area of continued focus by lenders, and various forms of protection have developed, including: • no release will occur unless the sale or distribution is for a bona fide business purpose, the primary purpose of which is not to release such guaran- tee, no event of default is then continuing and/or such sale or distribution is with an unaffiliated third party; • release of a subsidiary guarantor is a deemed investment and permitted solely to the extent there is sufficient investment capacity; and/or • a subsidiary guarantor is released only upon ceas- ing to be a subsidiary (ie, less than majority owned) of the borrower.
689 CHAMBERS.COM
Powered by FlippingBook