CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
• setting out the restrictions imposed on the junior creditor, including any “standstill” periods, restrictions on the ability to accept payments under the junior debt above a certain threshold, restrictions on amendments to the junior debt and/or caps on the maxi- mum amount of debt the junior lender can advance; • outlining the rights and obligations of the parties in a bankruptcy proceeding, including the waiver by the junior creditor of its right to object to debtor-in-possession (DIP) financing arranged by the senior creditor; and • establishing a procedure by which the junior creditor must return any payments received by it in contravention of the intercreditor agreement. Standstill periods The most heavily negotiated point in an inter- creditor agreement is often the length of the standstill period. A standstill prohibits the jun- ior creditor from taking any enforcement action under the junior security until the expiry of a pre-agreed period of time, typically between 30 and 180 days. This gives the senior creditor an opportunity to initiate its own enforcement pro- ceedings and to take control of the realisation efforts. If the senior creditor fails to do so before the standstill period expires, the junior creditor can commence enforcement proceedings. Any proceeds received – whether by the senior or junior creditor – are applied in accordance with the waterfall set out in the intercreditor agree- ment. Occasionally, an intercreditor agreement will also give the junior creditor the right to purchase the senior debt at par if the senior debt is accel- erated. The obligations and security would be assigned by the senior creditor to the junior
creditor, and the junior creditor can thereafter take control of the enforcement proceedings. 4.2 Bank/Bond Deals In financing structures that involve secured bank loans and secured debt securities such as bonds, sometimes both sets of creditors’ rights will rank pari passu, but more commonly the rights of the bondholders will be subordinate to those of the bank lenders. The bondholders, to the extent secured, would typically have a silent second lien, and their rights to act against the borrower would be materially curtailed by inter- creditor arrangements, with the bondholders being subject to all the restrictions described in 4.1 Typical Elements , including a standstill on the exercise of remedies. Where the two sets of creditors have equal rank- ing rights, the bank lenders often still control any exercise of remedies. The process of realising on collateral as the structure of a typical syn- dicated bank loan lends itself to a more timely and focused enforcement of rights, whereas bondholders would typically be delayed by the need to call a meeting to provide instructions to their indenture trustee or collateral agent. In such cases, following the enforcement of rem- edies and the realisation on collateral, the pro- ceeds of realisation (after the recoupment of any expenses associated therewith) are shared between the groups of creditors according to their contractual entitlements. 4.3 Role of Hedge Counterparties Unlike in the United States, where many banks have “hedge affiliates” , hedge agreements in Canada are typically entered into with the banks themselves; in other words, the same legal entity that acts as the secured lender under the bor- rower’s credit facilities also acts as the hedge counterparty. Although hedge obligations are
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