NETHERLANDS Law and Practice Contributed by: Gianluca Kreuze, Ruben den Hollander, Anne van Geen and Sanne van Esterik, Loyens & Loeff
The primary purpose of the intercreditor agree- ment is to rank the creditor’s debt and their enti- tlements to the enforcement proceeds and by contractually restricting their behaviour; by for example arranging when and by whom security might be enforced and when payments can be made by a borrower to a given class of credi- tors. Intercreditor arrangements in Dutch law debt financings are considered largely similar to those in key jurisdictions, such as the United Kingdom. A wide variety of types of documenta- tion is available and applied, ranging from short form priority deeds to long form intercreditor agreements based on the relevant LMA format. The big difference between LMA based inter- creditor agreements and US law–based inter- creditor agreements is that the LMA–based intercreditor agreements assume enforcement of security, whilst the US law–based intercredi- tor agreements assume restructuring under the US Chapter 11 upon acceleration of the debt. We often see intercreditor agreements in uni- tranche leveraged finance transactions, where a debt fund will pair up with a commercial bank for the purpose of financing working capital. The debt fund will typically provide the term loans for the purpose of paying the purchase price and the commercial bank will provide a revolving facility for working capital of the target group. There is a tendency that commercial banks only want to provide the working capital solution if they can also participate in the term loans to make it commercially attractive. Subordination In the Netherlands, there are essentially three ways of implementing subordination, as follows. • Contractual (claim) subordination – as men- tioned, creditors can agree on a different ranking by way of contractual arrangements.
In this case, the creditors typically finance the same borrower and share in the same secu- rity package of the same ranking, which is often granted in favour of a common security agent. The ability to enforce the security of the junior creditor will be restricted by con- tractual arrangements. • Lien subordination (in rem) – both the junior lender and the senior lender finance the same borrower and have security over the same collateral, but different in ranking. The ranking is determined by the moment of perfection of the security and has property law effect. Dutch law also allows for the parties to imple- ment a change of ranking of existing security rights. Any amendments and consents to the priority of security rights are subject to the same formalities as are required for creating a new security interest. • Structural subordination – claims are sub- ordinated based on the corporate structure of the relevant debtors, rather than by way of contractual arrangements. For example: a junior lender provides a loan to a parent company, the shareholder of the corporate group to which the senior lender makes its loan. Security, if any, for the junior loan will be granted at parent level, and security for the senior debt will be granted at corporate group level. Funds will only be upstreamed from the corporate group to the parent company (to be applied towards repayment of the junior loan) if there is still value left after the senior loan has been repaid. In practice, the upstream- ing of cash from the corporate group to the parent level is subject to restrictions in the senior loan documentation protecting the senior lenders from cash “leakage” to the par- ent company, which leakage would effectively allow for the junior creditor to take priority over the senior creditor.
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