USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
evidenced by a note owed by the acquirer to the seller, but such arrangements are rare. 3.6 Asset-Based Financing As described in 3.1 Senior Loans , it is relative - ly common for a financial sponsor acquirer to obtain a first-lien revolving credit facility, a first- lien term loan and a second-lien term loan, and from time to time that revolving credit facility is an asset-based revolving facility. Asset-based revolving credit facilities have a maximum com- mitment size and borrowings are further limited by “borrowing base” , which is typically meas- ured with reference to the value of inventory and accounts receivable. Asset-based revolving credit facilities can involve substantial upfront due diligence, including field exams and apprais- als, so advance planning is required when con- sidered as a component of acquisition finance. Structured finance products, such as asset- based securitisations, are generally not used in US acquisition finance, although they may be implemented following closing. For non-investment grade debt financings, it is fairly common to combine two or more secured debt instruments with different levels of lien pri- ority on the same collateral. All of the assets may be pledged to the creditors under one or more debt instruments on a first-lien basis and to the creditors under other debt instruments on a second-lien basis. For example, some finan- cial sponsor acquirers structure their acquisition debt to include a first-lien revolving credit facil- ity, a first-lien term loan and a second-lien term loan. Alternatively, creditors under different debt instruments may have “crossing liens” , such as 4. Intercreditor Agreements 4.1 Typical Elements
when the lenders on a receivables and invento- ry-based facility have a first-lien security interest on receivables and inventory and a second-lien security interest on all of the borrower’s other assets, while the lenders of a term loan have a second-lien security interest on receivables and inventory and a first-lien security interest on all of the borrower’s other assets. Intercreditor Agreement In structures where different sets of creditors have different lien priorities, a representative of each creditor class will execute a document known as the intercreditor agreement. In an intercreditor agreement, the different classes of secured creditors will document their agree- ment with respect to the following, among other things: • the relative priorities of their claims and the repayment and security enforcement pro- ceeds “waterfall” ; • the limitations imposed on junior lien credi- tors, including the “standstill” provision; • certain bankruptcy matters, including the waiver by junior lien creditors of the right to object to a debtor-in-possession (DIP) facil- ity that is approved by the first-lien creditors, subject to certain limitations including a cap on the size of the DIP facility; and • any turnover obligations imposed on junior lien creditors when they receive a payment in contravention of the agreed lien priority. The intercreditor agreement also often includes a purchase option provision that allows the jun- ior lien creditors to purchase all of the interests of the senior lien creditors following an event of default under the instruments governing the sen- ior lien debt.
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