In two recent posts I discussed (i) the structure of unitranche facilities and their growing acceptance in the market and (ii) the uncertainty inherent in these facilities because they have not been tested by a troubled economic environment. Below I address certain of the substantive differences between common terms contained in agreements among lenders (or AALs) found in unitranche transactions and more traditional intercreditor agreements between first lien and second lien lenders. Note that because the unitranche market continues to develop, the standardization found in intercreditor agreements does not yet exist for AALs and many terms remain negotiable.
Because unitranche facilities group lenders with diverse priorities in a single lien, participating lenders are reasonably cautious with regard to third parties that may enter the syndicate by virtue of assignment. As a result, AALs commonly include provisions allowing lenders a right of last offer (or ROLO) before debt is assigned to a third party (alternatively, this may be structured as a right of first offer). These provisions are often mutual and require that a lender first offer its debt to other lenders within its tranche and, if no such lender opts to acquire the debt, to lenders in the other tranche of debt. The mandatory notice period will necessarily delay an assignment to a new lender (typically by as much as 30 days). If a ROLO is exercised by one or more lenders in a different tranche, the group will face cross-pollination of lenders, perhaps creating a scene for conflict going forward. In order to minimize the risk of such conflict, AALs often restrict a cross-over lender from exercising voting rights unless it owns a minimum percentage of debt in the new, subject tranche (for e.g., 75%). Unlike AALs, intercreditor agreements do not contain similar hurdles to assignment.
A common intercreditor agreement will allow the first lien lenders to exercise remedies without delay from, or the consent of, the second lien lenders following a default or event of default. This includes acceleration, commencing an involuntary bankruptcy, or initiating foreclosure proceedings. The second lien lenders are subject to standstill periods of as many as 180-days following a default or event of default before they can direct their agent to exercise any such remedies (if the first lien lenders have not then commenced recovery actions). In an AAL, however, “first out” lenders will often be subject to a standstill before they are able to exercise remedies (subject to certain exigent circumstances). This may be as long as 45 days from their delivery of notice to the “last out” lenders. This first out standstill, unique to unitranche facilities, is a product of the importance of buy-out rights, allowing some reasonable time for the last out lenders to consider and complete an acquisition of the first out obligations before enforcement activity. If those last out lenders do not exercise their contractual buy-out right, the first out lenders can exercise remedies and the last out lenders will be subject to a standstill (although often not as long as that contained in an intercreditor agreement).
It is important that all lenders carefully review the buy-out provisions in an AAL. While they are mutual (unlike those in an intercreditor), they may not provide for acquisition of the entirety of the obligations owed by the borrower to the first out lenders. In certain AALs the last out lenders may not be required to purchase obligations incurred in excess of pre-agreed caps, for e.g., unanticipated obligations owed in respect of hedges, bank products or protective advances. If this is the case in an AAL, it is important that those lenders holding residual claims retain the benefit of their secured interests.
Certainly, many other substantive differences exist between a typical AAL and intercreditor agreement. As unitranche facilities become ever more prevalent, new lenders entering the market must appreciate these differences and be prepared for a new, fast-paced lending environment.