USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
(see 3.1 Senior Loans and 4.1 Typical Elements for discussions of “super-senior” priority), it is also often the case that the bank lenders are able to control enforcement, but their ability to do so may be more limited, particularly when the aggregate principal amount of bank loans is less than the aggregate principal amount of debt securities with the same lien priority. 4.3 Role of Hedge Counterparties In the USA, hedge counterparties are not typi- cally direct parties to intercreditor agreements. Hedging arrangements provided by secured lenders or their affiliates may be guaranteed and secured on the same basis as secured loans. Typically, hedge counterparties have no voting rights or other direct control mechanisms. 5. Security 5.1 Types of Security Commonly Used In the USA, the most important legal principles related to security interests in personal property are found in Article 9 of the Uniform Commer- cial Code (UCC), as adopted by the states. In contrast, security interests in real property are generally covered by other state law rather than the UCC. Article 9 of the UCC addresses the “creation” and “perfection” of a security interest in person- al property. Creation is the process by which a creditor obtains a valid security interest in the assets of a debtor. Perfection is the process by which a creditor ensures that its security interest will be effective in a bankruptcy of the debtor. The following must occur in order for a secu- rity interest in personal property to be properly created (in other words, attach to the personal property of a debtor):
One of the most important provisions in an inter- creditor agreement is referred to as the “stand- still” provision. This provision provides that only the first-lien creditors may exercise enforcement rights for a given period of time (often 180 days) following a trigger event such as an accelera- tion event under a second-lien debt instrument. If the standstill period has elapsed and the first- lien creditor class is not pursuing enforcement, the second-lien creditors may take enforcement action. To the extent the second-lien creditors receive proceeds from enforcement, they remain subject to the repayment waterfall. In European acquisition financing, debt securi- ties governed by NY law are often secured on a pari passu basis with term loans, with the intercreditor agreement governing the agree- ment amongst these pari passu creditors. In transactions with debt securities and revolving credit facilities, although both secured on a first lien basis, the revolving credit facilities (as well as potentially hedging) are usually secured on “super-senior” basis, which means the lenders under the revolving credit facility have priority over other senior secured debt (usually NY law- governed debt securities) in receiving the pro- ceeds of common security enforcement, and usually control enforcement of the security in the first instance. 4.2 Bank/Bond Deals In transactions that involve bank loans secured on a first-lien basis and debt securities secured on a second-lien basis, the debt securities will normally have “silent” second lien, meaning that the first-lien lenders would control enforcement pursuant to the intercreditor agreement and the bondholders would be subject to the standstill and other limitations discussed in 4.1 Typical Elements . In bank/bond transactions where both creditor groups share a first lien on the collateral
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