Inside M&A - September/October 2009

Profession:McDermott Will & Emery
 
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Contents Defining Intercreditor and Subordination Terms in Deal Negotiations Amendment to New York's Power of Attorney Law Defining Intercreditor and Subordination Terms in Deal Negotiations By Gary B. Rosenbaum

The overheated debt markets from 2003 to 2007 resulted in a record volume of buyout transactions by financial sponsors. The proliferation of second lien debt provided by hedge funds, private equity funds and other nontraditional investment vehicles like collateralized loan obligations satisfied the demand for leveraged debt created by these acquisitions. In contrast to traditional mezzanine indebtedness, second lien debt was less expensive and did not dilute the sponsor's equity ownership. In the current post-credit freeze era, second lien financing is disappearing, and mezzanine and other subordinated debt options are reemerging to fill the gap between senior loans and equity with a wide range of intercreditor and subordination terms. This article will discuss the importance of clearly defining these terms early in the process.

As the credit freeze begins to show signs of thawing, private equity groups and strategic acquirers looking to close buyout loans should expect banks and other lenders to approach these transactions with a "back to basics" mentality. An article in the October 9, 2009, edition of The Wall Street Journal entitled, "In Today's LBO Arena, Much Sweat, More Equity," provided recent examples of the more conservative capital structure mandated by senior lenders. Another area in which senior lenders' renewed preoccupation with fundamentals has manifested itself is intercreditor agreements. By entering into an intercreditor agreement with appropriate standstill, payment blockage, turnover and other key provisions, senior lenders and private equity groups may be able to avoid an unwelcome surprise in the form of a junior lender with the ability to disrupt workout negotiations at a later date.

Types of Subordination Debt Subordination Debt subordination refers to the agreement by a subordinated lender to defer payment of some or all of its claims until the senior loans are paid in full. A partial debt subordination would usually permit a subordinated lender to receive some or all of its scheduled payments in the absence of an event of default under the senior credit facility. A complete debt subordination means that the subordinated lender would not receive any payment on its loans until the senior lender received payment in full on its senior loans. A senior lender might require this type of subordination in a buyout...

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