AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin
ment of interest to the junior creditors is permit- ted, subject to certain conditions being satisfied (which may include a leverage or debt service coverage ratio set at a tighter threshold than the financial covenants contained in the senior debt documents, and that no event of default occurs). Equity or quasi-equity financing provided by non-sponsor entities will always be subject to contractual subordination unless it is structurally subordinated (sponsor debt is typically subject to both). The common position is that equity or quasi-equity financing is deeply subordinated to all other layers of the acquisition debt, and no payments can be made, except to the extent they are made from amounts that would oth - erwise be permitted to be distributed to equity holders. Structural subordination is less common, how- ever with a notable exception for holdco PIK instruments discussed in 3.2 Mezzanine/Pay- ment-in-Kind (PIK) Loans , which is mainly used for mezzanine or PIK debt, or for other vendor financing raised at the holdco or topco levels. Intercreditor agreements usually contain a provi- sion whereby any amounts paid by a debtor to a subordinated creditor are agreed to be paid by the subordinated creditor to the senior creditor (this is referred to as “turnover subordination” ) or held on trust by that subordinated creditor for the benefit of the senior creditor until the senior creditor has been repaid (referred to as “trust subordination” ). In addition to regulating the right of repayment of competing creditors, intercreditor agree- ments will also regulate how the proceeds of the enforcement of security are to be applied (com- monly known as the enforcement waterfall) and set out which creditors can instruct the security
agent in relation to the enforcement and release of the security (which is typically shared by the senior and junior debt). The default position will be that the senior credi- tors rank ahead of the subordinated creditors in the waterfall, and as such, the senior credi- tors will form the “instructing group” unless and until the subordinated creditors obtain rights to enforce. The rights of subordinated creditors to enforce their security will be limited and often arise only after a standstill period has expired (in some transactions, the subordinated creditors will not benefit from any such right prior to the senior debt being discharged). The prevalence of unitranche-style facilities has had an impact on intercreditor arrange- ments. The working capital provider is typically given “super-senior” status on any recoveries of enforcement, which has manifested (from an intercreditor perspective) in a modification of certain terms to lessen these lenders’ ability to unilaterally take (or control) enforcement action. 4.2 Bank/Bond Deals As noted in 3.4 Bonds/High-Yield Bonds , there is no domestic high-yield market to speak of. Accordingly, the bank and bond transactions seen in the market are governed by laws other than those of Australia (and, therefore, the inter- creditor position and approach reflect the norms in those markets). 4.3 Role of Hedge Counterparties There will often be hedging liabilities owed to hedge counterparties relating to the hedging of interest and/or exchange rate risks under the senior (and potentially the mezzanine) debt documentation.
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