1. finance

Draft Guidelines for
intercreditor agreements in
UK commercial real estate
finance transactions – 2013
Commercial
Real Estate
Finance Council
Europe
®
Market Consultation
Issued on 14 November 2012
Responses due by 20 January 2013
COMMERCIAL REAL ESTATE FINANCE COUNCIL EUROPE
DRAFT INTERCREDITOR GUIDELINES
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CONTENTS
1.INTRODUCTION
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2.KEY STRUCTURAL ASSUMPTIONS
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2.1
2.2
2.3
2.4
2.5
2.6
Facility Agreements
Downstreaming of proceeds of mezzanine funding
Mezzanine hedging
Subordinated Loans
Security structure
Structure diagram
3.KEY TERMS TO BE INCLUDED IN THE INTERCREDITOR AGREEMENT
Parties
Ranking and priority of Debt
Limited Senior Headroom
Additional Senior Debt and Excess Senior Debt
Property Protection Loans
Anti-layering
Amendments and waivers
by Senior Creditors
by Mezzanine/Junior Creditors
by Subordinated Creditors
Payment Stop Notice
Order of application of proceeds
prior to the occurrence of a [Senior Default]
After the occurrence of a [Senior Default]
Shared Security
Mezzanine Security
Mezzanine cure rights
Option to purchase the Senior Loan
Valuations
Restrictions on enforcement
Permitted Mezzanine Enforcement Action
Grace period
Release of Mezzanine and Subordinated liabilities
Cross default provisions
Representations
Consultation
Transferability
Governing law
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1.INTRODUCTION
1.1The Commercial Real Estate Finance Council (Europe) (CREFC) established the Intercreditor Working
Group in order to encourage principals, service providers and advisers in the European commercial
real estate industry to promote greater consistency in and understanding of intercreditor issues
which arise in the context of commercial real estate finance transactions. CREFC believes that by
promoting a common set of widely understood principles, participants in the industry will be better
equipped to work on transaction structures where often-encountered issues merit a similar approach.
The Intercreditor Working Group recognises that there is no “one size fits all” solution to all issues,
and that many matters will remain open to negotiation and to tailoring to the needs and requirements
of any particular transaction. This paper does not seek to impose a “base case” opening position on
matters commonly negotiated between transaction parties. Rather, it seeks to promote a common
approach to the issues where this can be achieved.
1.2The guidelines set out in this paper are intended to be applicable to lending transactions which are
funded directly by lenders (with no intention to subsequently securitise) and to those which are
(or are intended to be) funded, in whole or in part, through the CMBS markets. The publication of
these guidelines has two key aims: first, to promote consideration of a common set of issues in all
intercreditor agreements going forward, addressing issues which have proved to be troublesome
during the experience of the last few years; and, second, to encourage market participants to have
confidence that an acceptable compromise between the different and frequently conflicting interests
of different creditors can be achievable. Each of these aims seeks to promote a more active market in
real estate finance and investment.
1.3This paper, in its current version, is being published for consultation amongst market participants
generally. Those active in the commercial real estate industry (in whatever capacity) are encouraged
to submit comments on the draft guidelines – whether those comments be conceptual, structural
or detail in nature. All comments received will be carefully considered by the Intercreditor Working
Group and will be taken into account in publishing the completed version of these guidelines in the
first quarter of 2013.
1.4This paper accordingly sets out the key terms and principles to be considered for inclusion in an
intercreditor agreement governing the relationship between the creditors in respect of, among others,
a senior facility (the Senior Facility) and a mezzanine facility (the Mezzanine Facility) (the Intercreditor
Agreement), each to be made available in respect of the same asset(s).
1.5This paper has been prepared using a UK real estate financing as its paradigm. It assumes that the
relevant obligors will be English-incorporated (or established) entities. It contains a set of guidelines
to be considered – not a standard model. It touches on many areas where detailed tax and legal
advice will be required. In particular, appropriate additional legal and tax considerations will apply for
real estate and/or entities in other jurisdictions.
1.6This paper does not cater for an A/B loan structure under which a single loan made to a single
borrower is split behind the scenes (without any involvement of the borrower), at some point on or
after origination, into senior and junior loan interests. It is felt that this type of loan structure will not
typically find market favour in the current economic environment. However, the principles set out in
this paper would not preclude either a senior or a mezzanine loan being further split (into, e.g., senior
A and senior B, as applicable), nor are the suggested solutions unique to structurally subordinated
mezzanine finance.
1.7If there are to be, for example, transparent senior A and senior B loans, or mezzanine A and mezzanine
B loans, within a structure from the outset then the guidance and principles in this paper will need to
be adapted accordingly.
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2.KEY STRUCTURAL ASSUMPTIONS
2.1
acility Agreements: This paper is prepared on the assumption that there will be a separate underlying
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loan agreement for each of the Senior Facility (the Senior Facility Agreement) and the Mezzanine
Facility (the Mezzanine Facility Agreement)1. The borrower under the Senior Facility is referred
to as the Senior Borrower (or PropCo), and the borrower under the Mezzanine Facility (which is
expected to be the parent of the holding company (HoldCo) of the Senior Borrower) is referred to as
the Mezzanine Borrower. The Senior Borrower and the Mezzanine Borrower are together referred to
as the Borrowers.
2.2
ownstreaming of proceeds of mezzanine funding: This paper further assumes that the mezzanine
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funding will be made available to the Senior Borrower by virtue of downstream intercompany loans
(a) from the Mezzanine Borrower to HoldCo (the HoldCo Loan) and (b) from HoldCo to the Senior
Borrower (the PropCo Loan). The HoldCo Loan and the PropCo Loan are together referred to as the
Interco Loans. Interest on the Interco Loans should be payable on a “pay if you can” basis, in order to
avoid the Interco Loan claims pushing the Senior Borrower and/or Holdco into insolvency.
2.3
ezzanine hedging: This paper includes reference to provisions relating to the position of a Mezzanine
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Hedge Counterparty although it is not common, in practice, to put a swap in place for the Mezzanine
Facility. More likely, the Mezzanine Borrower will be required to purchase a cap or take a fixed rate
loan, with the Mezzanine Lender hedging itself (if required) and in such circumstances the Mezzanine
Lender would expect to benefit from an indemnity in respect of hedge break costs (usually set out in
the Mezzanine Facility itself).
2.4
ubordinated Loans: In addition, there will most likely be sponsor/shareholder debt lent into one or
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more of the Borrowers and/or security providers (together, Obligors). These loans should be fully
subordinated to the Senior Loan, the Interco Loans and the Mezzanine Loan. Consideration should be
given as to whether or not these loans (Subordinated Loans) should be secured or unsecured (and,
if they are secured, the relevant creditors should be party to the Intercreditor Agreement and the
Subordinated Loans should be catered for at the bottom of the cashflow waterfalls in the Intercreditor
Agreement). If they are unsecured, more common practice would be for the creditors to enter into
subordination agreements with the Agents, fully subordinating the claims of those creditors in respect
of the Subordinated Loans (Subordination Agreements). Consideration should also be given as to
whether Subordinated Loans should be lent down through each entity in the chain (following the
downstreaming model for the Mezzanine Debt).
2.5
ecurity structure: This paper further assumes that a common security package (in the form of
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registered mortgages and full fixed and floating charges over all their assets) will be granted by each
of the Senior Borrower and HoldCo in favour of a security trustee (the Security Trustee), who will
hold the security granted to it on trust for (a) the finance parties under the Senior Facility (the Senior
Creditors) and (b) the finance parties under the Mezzanine Facility (the Mezzanine Creditors) (together,
the Shared Security), in each case to be held and applied according to the ranking and waterfall
provisions of the Intercreditor Agreement. Additionally, the Mezzanine Creditors will benefit from
first-ranking share pledges over the shares in the Mezzanine Borrower and HoldCo and assignments
over the receivables under any Subordinated Loans (including the HoldCo Loan) granted by either of
them (the Mezzanine Security). The Shared Security is, as its name would suggest, shared between
the Senior Creditors and the Mezzanine Creditors, whereas the Mezzanine Security is granted for the
benefit only of the Mezzanine Creditors. However, the enforceability of the Mezzanine Security will be
subject to restrictions as set out in the Intercreditor Agreement and further described below.
2.6
tructure diagram: Annexed to this paper is a structure chart illustrating this assumed transaction
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structure.
It is not necessarily the case that each loan agreement will be based on the same form, although some sponsors may push for this to
ensure consistency of definitions, particularly for common financial covenants (or inputs for such covenants).
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DRAFT INTERCREDITOR GUIDELINES
KEY TERMS TO BE INCLUDED IN THE INTERCREDITOR AGREEMENT
Parties
The parties to the Intercreditor Agreement should be:
(a)
the facility agent under the Senior Facility (the Senior Agent);
(b)the security trustee in respect of the Shared Security (the Security
Trustee) (likely to be the same entity as the Senior Agent);
(c)
the lenders under the Senior Facility (the Senior Lenders);
(d)
the senior hedge counterparty (if any) (the Senior Hedge Counterparty);
(e)the facility agent/security trustee under the Mezzanine Facility (the
Mezzanine Agent);
(f)
the lenders under the Mezzanine Facility (the Mezzanine Lenders);
(g)
the junior hedge counterparty (if any) (the Junior Hedge Counterparty);
(h)
HoldCo (as creditor under the PropCo Loan);
(i)
the Mezzanine Borrower (as creditor under the HoldCo Loan); and
(j)the Senior Borrower and any guarantors of the Senior Facility (together
with the Senior Borrowers, the Senior Obligors)2.
As noted above, if the sponsor (or any of its affiliates or subsidiaries) (a
Subordinated Creditor) provides a Subordinated Loan to a Borrower or
any other Obligor or has other direct claims against any of them, then
the sponsor (or such affiliate or subsidiary) should either (i) become
party to the Intercreditor Agreement for the purpose subordinating its
claims and rights to those of the Senior Creditors and the Mezzanine
Creditors or (ii) enter into separate Subordination Agreements.
Where the Obligors are party to the Intercreditor Agreement, it should contain
provisions making it clear that where the Intercreditor Agreement and the
facility documents conflict, the provisions of the Intercreditor Agreement
prevail.
Ranking and
priority of Debt:The Intercreditor Agreement should include a clear statement of the ranking of
the liabilities which are to be subject to its terms, as follows:
irst, pro rata: the debt under the Senior Facility [and liabilities in respect
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of the Senior Hedging] (together, including any Additional Senior Debt, the
Senior Debt];
econd, pro rata: the debt under the Interco Loans (the Interco Debt), and under
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the Mezzanine Facility3 and liabilities in respect of the Mezzanine Hedging
The Obligors will most likely be party to this form of Intercreditor Agreement. In particular, the sponsor group companies which are
creditors under the Interco Debt require to be party to ensure effective subordination of the interco/mezzanine claims.
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In practice, the Interco Debt and the Mezzanine Debt represent, together, the overall mezzanine debt position (albeit at different levels).
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(if applicable4) (together, the Mezzanine Debt);
Third, any Excess Senior Debt (as described below); and
[Fourth, any debt under the Subordinated Loans (the Subordinated Debt).5]
The precise ranking of all claims is a matter for commercial negotiation
between the transaction parties. In addition, it should be specifically made
clear in the drafting of the “ranking statement” that this is subject to the more
detailed provisions of any later cashflow waterfalls (which may, for example,
permit payment of mezzanine/interco interest prior to senior principal prior to
the occurrence of a default).
Limited Senior Headroom: There should be only a limited “senior headroom” concept, to allow recovery
by the relevant Senior Lenders of certain additional amounts ahead of the
Mezzanine claims (Additional Senior Debt).
- Additional Senior Debt
and Excess Senior Debt
Additional Senior Debt will typically comprise:
(a) the amount of any Property Protection Loans (as described below)
made by one or more Senior Lenders [up to a cap of £•]; and
(b)
capitalised interest, including default interest.
Exactly what will be comprised in Additional Senior Debt, and the level of any
caps, will remain a matter for commercial negotiation. Any liabilities of the
Obligors to the Senior Creditors in excess of the permitted Additional Senior
Debt will rank behind the Mezzanine Debt as Excess Senior Debt.
- Property Protection LoansThe Senior Facility may allow the Senior Lender the ability to pay (a) certain
property-related expenses (such as headlease rents, insurance, utilities,
property management and other costs) and (b) certain lender-incurred
expenses (such as running costs if the Senior Loan has been securitised) and
in each case to recover these from the Obligors as part of the Senior Debt. Any
amounts so paid may be recovered as indemnity payments or may specifically
be structured as loans (Property Protection Loans) to the Senior Borrower.6
The definition of Property Protection Loans (and other amounts recoverable
as Additional Senior Debt) should thus be drafted taking into account those
permitted or envisaged under the Senior Facility.
Anti-layering:No additional financial indebtedness is to be permitted between the Senior
Facility and the Mezzanine Facility.
Amendments and waivers:
- by Senior CreditorsThe Senior Creditors will not be permitted to agree to amend or waive certain
material provisions of the senior finance documents (the Senior Finance
Documents) to which they are party without the prior consent of the Mezzanine
Agent (acting on the instructions of all Mezzanine Lenders or (with respect to
This should be included only if the Subordinated Lenders are party to the Intercreditor Agreement.
Consider whether the Mezzanine Creditors should be given the option to fund these amounts first. If so funded, they would form part of
the Mezzanine Debt and should not rank ahead of the Senior Debt.
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certain amendments) a majority of • % of the Mezzanine Lenders (the Majority
Mezzanine Lenders)).
The material provisions are provisions which would result in or which
relate to:
(a)
any change in the date of payment of any amount;
(b)an increase in the interest rate or margin or in any fee or other amounts
payable or the inclusion of any additional amount payable (whether
as margin, fee or otherwise, and whether or not contingent on the
occurrence of any event);
(c)any change in the basis on which any payment is calculated, if the
effect of such change would be to increase any amount payable under
the relevant Senior Finance Document(s);
(d)an increase in or extension of commitments or in the principal amount
of the Senior Facility, or an extension of the categories of other amounts
which may constitute Senior Debt (for example, additional categories
of Property Protection Loans);
(e)any change in the term of the Senior Facility [(except an extension for
a period not exceeding • month(s))];
(f)any change to the [material] hedging covenants or arrangements set
out in the Senior Facility or related hedging strategy letter;
(g)any changes to the [material] [financial] terms of the Senior Hedging
agreement;
(h)any change to a financial covenant to make it more onerous (including
by changing any relevant definition) or the addition of any new financial
covenant;
(i)any change to any cashflow triggers, cash-trap or cash-sweep
provisions in the Senior Finance Documents (unless the effect of the
relevant change would be to release additional funds available to be
distributed to Mezzanine Creditors);
(j)any change to the rules of the Senior Finance Documents relating to
the Senior Lenders’ decisions or the definition of “Majority Lenders”;7
(k)a release of an Obligor other than in accordance with the terms of the
Senior Finance Documents and/or the Intercreditor Agreement;
(l)a release of security other than in accordance with the terms of the
Senior Finance Documents and/or the Intercreditor Agreement, unless
either an event of default (however described) under the Senior
Facility Agreement (a Senior Default) is outstanding or, in relation to
a disposal of any of the properties, if the aggregate disposal proceeds
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This may be extended to include reference to Senior Hedge Counterparties. The transaction parties will have to determine how weighted
voting will work taking into account hedge mark-to-market values. The market generally does not utilise this concept, but it remains a
possibility.
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together with any equity contribution and/or Subordinated Loan made
in connection with such disposal are not less than the aggregate of the
applicable release amount under the Senior Facility Agreement and the
applicable release amount under the Mezzanine Facility Agreement;
(m)a change to the definition of any, or the addition of any new, actual or
potential Senior Default [where the effect of the change would be to
make the Senior Defaults more likely to occur8]; and
(n)
any change to the right of a Senior Lender to assign or transfer.
Any consent required from a Mezzanine Lender will be deemed to be given
if the relevant Mezzanine Lender has not responded (either to consent or to
refuse consent) within • business days of written request.
Where the Senior Creditors are not restricted from making changes, then the
Mezzanine Creditors will be bound by any decision taken by the requisite
majority of Senior Creditors (which will be the instructing group for these
purposes).
The parties should consider whether or not the ability of the Mezzanine
Lenders/Creditors to block certain amendments should continue to apply if
the Mezzanine Debt is wholly under water.
- by Mezzanine/
Junior CreditorsPrior to the date on which all liabilities under the Senior Facility and Senior
Hedging have been paid in full (the Senior Discharge Date), the Mezzanine
Lenders and the Interco Lender(s) will not be permitted to agree to amend or
waive certain material provisions of the mezzanine finance documents (the
Mezzanine Finance Documents) or the Interco finance documents (the Interco
Finance Documents and, together with the Mezzanine Finance Documents,
the Junior Finance Documents), as applicable, without the prior consent of
the Senior Agent (acting on the instructions of all or (with respect to certain
amendments) a majority of • % of the Senior Lenders9 (the Majority Senior
Lenders)).
The material provisions are provisions which would result in or which relate
to:10
(a)an increase in the interest rate or margin or in any fee or other amounts
payable or the inclusion of any additional amount payable (whether
as margin, fee or otherwise, and whether or not contingent on the
occurrence of any event);
(b)any increase of commitments under the Mezzanine Facility or the
facilities with respect to the Interco Loan (the Interco Facilities) except
in certain permitted circumstances as set out below;
(c)any decrease in the term of the Mezzanine Facility;
If the borrower negotiated a less onerous event of default under the Senior Facility, the Mezzanine Lenders should not object.
It is thought that this should remain a decision for Senior Lenders alone, although it is possible that Senior Hedge Counterparties may
wish to have a say for particular matters. If this is the case, consideration will have to be given as to how the voting mechanics should
work taking into account the issues which may arise from this. See the previous footnote on this topic. Alternatively, (which is more
common) hedge counterparties may simply seek to negotiate certain entrenched rights which require their consent to vary.
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(d)a release of an Obligor (other than a Mezzanine-only Obligor) other
than in accordance with the terms of the Junior Finance Documents;
(e)a release of security other than (i) Mezzanine-only security or (ii)
otherwise in accordance with the terms of the Junior Finance
Documents;
(f)a change to the definition of any actual or potential Event of Default
(however described) under the Mezzanine Finance Documents[ where
the effect of the change would be to make the [Mezzanine Defaults]
more easily tripped11]; and
(g)any change to the right of a Mezzanine Lender to assign or transfer.
The “permitted circumstances” referred to in paragraph (b) above are as
follows: at any time prior to taking any permitted mezzanine enforcement
action, the Mezzanine Lenders may increase the principal amount of the
Mezzanine Facility by any amount agreed with the Mezzanine Borrower at that
time so long as the following conditions are met:
(i)the increase is made for the purposes of making a Property Protection
Loan, a cure payment, or remedying a Senior Default, in accordance
with the provisions of the Intercreditor Agreement;
(ii)the additional principal amount does not become due and payable
(other than pursuant to any permitted mezzanine enforcement action)
earlier than • months after the Senior Discharge Date;
(iii)the increase of principal could not reasonably be expected to result in
the insolvency of any Obligor; and
(iv)to the extent that such principal increase bears any interest or accrues
fees/commission at a rate in excess of the prevailing interest, or fees/
commission in relation to the existing Mezzanine Facility, then prior to
the Senior Discharge Date, such excess will only be due and payable
by the relevant Obligor (A) to the extent of amounts which would
otherwise be paid into its general account and provided no payment
stop notice is outstanding with respect to the Interco Loans and (B) if
the Senior Creditors have not taken any Enforcement Action.
- by Subordinated CreditorsPrior to the earlier of the Senior Discharge Date and the date on which all
liabilities under the Mezzanine Facility have been paid in full, the Subordinated
Creditors will not be permitted to amend or waive the terms of, or give any
consent under, any documents pursuant to which the Subordinated Loans are
constituted without the prior consent of the Majority Senior Lenders and the
Majority Mezzanine Lenders [where do to so would materially and adversely
affect the interests of the Senior Lenders and/or the Mezzanine Lenders].12
Payment Stop Notice:Prior to the Senior Discharge Date and the occurrence of a [Material] Senior
Default, interest and principal payments under the PropCo Loan, the HoldCo
Loan, the Mezzanine Facility and the Subordinated Loans (together with any
other upstream distribution of whatever nature, Upstream Payments) are to be
If the borrower negotiated a less onerous event of default under the Mezzanine Facility, the Senior Lenders should not object.
The parties should consider whether or not this carve-out should apply. For example, the sponsor may wish to capitalise outstanding
debt or undertake other intra-group reorganisations which may involve amending the sponsor debt arrangements.
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applied in accordance with the relevant Mezzanine/Interco Finance Documents.
If, following the occurrence and continuance of a [Material] Senior Default, the
Senior Agent issues a payment stop notice to the Senior Borrower, HoldCo,
the Mezzanine Borrower and the Mezzanine Agent (a Payment Stop Notice),
no Upstream Payments are permitted until the first to occur of: (a) an Excess
Cash Release Event (as defined below); (b) cancellation of the relevant Payment
Stop Notice by the Senior Agent; and (c) the Senior Discharge Date. In these
circumstances funds may thereafter to be applied in accordance with the predefault waterfall.
Material Senior Default means:
(i)an insolvency event of default under the Senior Facility Agreement
[(relating to actual, rather than potential, insolvency events)] relating
to any Obligor or Subordinated Creditor;
(ii)an actual or potential non-payment event of default (including a
prospective non-payment which the Senior Agent reasonably believes
will occur on the next payment date) under the Senior Facility
Agreement;
(iii)the breach of any financial covenant which is not cured in accordance
with the terms of the Senior Facility Agreement; or
(iv)the commencement of Enforcement Action (as defined below) by any
Senior Creditor,
and, for the purposes of paragraphs (i), (ii) and (iii), regardless of whether any
standstill or extension has been agreed by the Senior Agent and the Senior
Borrower.
it is a matter for negotiation what Senior Defaults will result in the ability to
serve a Payment Stop Notice. This concept may apply to all Senior Defaults,
not just a more restricted list. In addition, the parties should consider the
payment stop provisions in light of the accounts and payments provisions in
the Senior Finance Documents – the two concepts should dovetail.
Enforcement Action means action to:
(a)demand payment of any Debt (but only to the extent that the demand
is not satisfied);
(b)declare any Debt prematurely due and payable;
(c)enforce any Debt by way of attachment, set-off, execution or otherwise;
(d)exercise any right to require an Obligor [or a Subordinated Creditor] to
acquire any Debt;
(e)close out or terminate any senior hedging arrangements, unless
specifically permitted under the Senior Finance Documents;
(f)enforce, or require the Senior Agent or Mezzanine Agent (as applicable)
to enforce, any security by sale, possession, appointment of a receiver
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or administrator or otherwise;
(g)initiate or take any procedure or step or support the taking of any
procedure or step, or give any notice, in relation to:
(i)insolvency, winding-up or appointment of a liquidator,
reorganisation, administration, or appointment of an
administrator, or dissolution proceedings;
(ii)any voluntary arrangement, scheme of arrangement,
composition or assignment for the benefit of creditors; or
(iii)any analogous proceedings, whether relating to a natural
or legal person or entity (whether or not having corporate
personality),
in respect of any Obligor, whether by petition, convening a meeting, voting for
a resolution, or otherwise;
(h)bring or support any legal proceedings against an Obligor in relation
to any matter which would have a material adverse effect upon an
Obligor’s ability to meet its payment obligations under the finance
documents;
(i)take any other step, or exercise any right, in relation to the recovery of
the Debt or any part of it; and/or
(j)take any other step, or exercise any right, as provided for under the
Senior Finance Documents in relation to actions permitted in case of
an event of default.
xcess Cash Release Event means, following the service of a payment stop
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notice, the occurrence of • consecutive payment dates on which no [Material]
Senior Default remains outstanding.
An Obligor may only make a payment in respect of the Subordinated Debt then
due if such payment is not restricted by the Senior Facility Agreement and/or
the Mezzanine Facility Agreement or the Majority Senior Lenders and/or the
Majority Mezzanine Lenders (as the case may be) consent to such payment.
Order of application
of proceeds:The provisions relating to the order of application of proceeds should clearly
state if and, if so, the extent to which they are intended to override any “partial
payment” provisions in the underlying facility agreements.
- prior to the occurrence
of a [Senior Default]: Prior to the occurrence of a Senior Default or the service of a Payment Stop
Notice13, available funds are to be applied in the following order of priority14:
(a)in or towards payment pro rata of (i) all fees, costs and expenses of
The parties should clearly state when the waterfalls are to be switched. This will typically be on the occurrence of a Senior Default but
subject to the Payment Stop Notice and cure provisions set out elsewhere in the Intercreditor Agreement.
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The base case is that all payments (except Excess Senior Debt) to be made to the Senior Creditors in respect of funds derived from the
Senior Obligors/the Shared Security should be paid in priority to payments in respect of Mezzanine/Junior Debt where a departure from
this is required (for example, to distinguish between scheduled and non-scheduled amortization), this may be specifically negotiated.
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the Senior Agent [and (ii) all fees, costs and expenses of any servicer
appointed by the Senior Agent and/or a Senior Lender15];
(b)in or towards payment pro rata of (i) any periodic payments (not being
payments as a result of termination or closing out) due and payable to
the Senior Hedge Counterparty and (ii) any accrued interest, fees and
other amounts (other than principal) due and payable to the Senior
Lenders;
(c)in or towards payment pro rata of (i) any amounts due and payable to
the Senior Hedge Counterparty as a result of termination or closing out
of the Senior Hedging [(except for amounts payable under paragraph
(d) below)16] and (ii) any principal due and payable to the Senior
Lenders (other than Excess Senior Debt);
(d)[in or towards payment of any amounts due and payable to the Senior
Hedge Counterparty arising as a result of termination or closing out
of the Senior Hedging as a consequence of its becoming illegal for
the Senior Hedge Counterparty to comply with its obligations or the
occurrence of any event of default or additional termination event
relating to the Senior Hedge Counterparty;17]
(e)in or towards payment of all fees, costs and expenses of the Mezzanine
Agent;
(f)in or towards payment to [the Mezzanine Borrower as creditor in
respect of the HoldCo Loan in an amount equal to the aggregate of] (i)
any periodic payments (not being payments as a result of termination
or closing out) due and payable to the Mezzanine Hedge Counterparty
and (ii) any accrued interest, fees and other amounts (other than
principal) due and payable to the Mezzanine Lenders;
(g)[if any Excess Senior Debt can arise pre-default, in or towards payment
of any Excess Senior Debt then due and payable to the Senior Lenders];
and
(h)in or towards payment of the surplus (if any) to the Obligors.
- After the occurrence
of a [Senior Default]:
- Shared SecurityAfter the occurrence of a Senior Default (but subject to the provisions set out
in “Payment Stop Notice” above and subject to any permitted cure being
effected), all amounts recovered by or on behalf of the Senior Creditors
(including proceeds of enforcement of the Shared Security) shall be applied in
the following order of priority18:
Include if the Senior Facility envisages CMBS transactions and the engagement of a servicer/special servicer whose fees and costs are
to be indemnified by the Senior Borrower on a loan default.
16
The subordination of certain close-out amounts payable to a hedge counterparty (the so-called “flip clause”) is typically only found in
capital markets transactions.
17
See prior footnote.
18
The precise order of priorities is a matter for negotiation. As between Senior Creditors, the hedge may be senior or, more commonly,
pari passu. If the Subordinated Creditors are party to the intercreditor agreement then they should be catered for in the waterfall also.
Note also that subordination of certain payments to hedge counterparties arising as a result of a default or event affecting them may
not be appropriate for transactions where a capital markets financing is not expected.
15
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(a)in or towards payment pro rata of [(i)] all fees, costs and expenses of
the Senior Agent [and (ii) all fees, costs and expenses of any servicer or
special servicer appointed by the Senior Agent and/or a Senior Lender
19
];
(b)in or towards payment pro rata of (i) any periodic payments (not being
payments as a result of termination or closing out) due and payable to
the Senior Hedge Counterparty and (ii) any accrued interest, fees and
other amounts (other than principal) due and payable to the Senior
Lenders;
(c)in or towards payment pro rata of (i) any amounts due and payable to
the Senior Hedge Counterparty as a result of termination or closing out
of the Senior Hedging [(except for amounts payable under paragraph
(d) below)20] and (ii) any principal due and payable to the Senior
Lenders (other than Excess Senior Debt);
(d)in or towards payment of any amounts due and payable to the Senior
Hedge Counterparty arising as a result of termination or closing out
of the Senior Hedging as a consequence of its becoming illegal for
the Senior Hedge Counterparty to comply with its obligations or the
occurrence of any event of default or additional termination event
relating to the Senior Hedge Counterparty21;
(e)in or towards payment of all fees, costs and expenses of the Mezzanine
Agent;
(f)in or towards payment to [the Mezzanine Borrower as creditor in
respect of the HoldCo Loan in an amount equal to the aggregate of] (i)
any periodic payments (not being payments as a result of termination
or closing out) due and payable to the Mezzanine Hedge Counterparty
and (ii) any accrued interest, fees and other amounts (other than
principal) due and payable to the Mezzanine Lenders;
(g)in or towards payment to [the Mezzanine Borrower as creditor in
respect of the HoldCo Loan in an amount equal to the aggregate of] (i)
any amounts due and payable to the Mezzanine Hedge Counterparty
as a result of termination or closing out of the Mezzanine Hedging
(except for amounts payable under paragraph (h) below) and (ii) any
principal due and payable to the Mezzanine Lenders;
(h)in or towards payment to [the Mezzanine Borrower as creditor in
respect of the HoldCo Loan in an amount equal to the aggregate of]
any amounts due and payable to the Mezzanine Hedge Counterparty
arising as a result of termination or closing out of the Mezzanine
Hedging as a consequence of its becoming illegal for the Mezzanine
Hedge Counterparty to comply with its obligations or the occurrence
of any event of default or additional termination event relating to the
Mezzanine Hedge Counterparty;
Include if the Senior Facility envisages CMBS transactions and the engagement of a servicer/special servicer whose fees and costs are
to be indemnified by the Senior Borrower on a loan default.
20
The subordination of certain close-out amounts payable to a hedge counterparty (the so-called “flip clause”) is typically only found in
capital markets transactions.
21
See prior footnote.
19
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DRAFT INTERCREDITOR GUIDELINES
(i)in or towards payment of any Excess Senior Debt payable to the Senior
Creditors;
(j)in payment to any other person the Senior Agent is obliged to pay in
priority to members of the Senior Borrower’s group; and
(k)the balance, if any, in payment to the Senior Borrower or HoldCo.
- Mezzanine Security Any proceeds of enforcement of the Mezzanine Security are for the benefit of
the Mezzanine Creditors only. If applicable, the order of priority as between
different Mezzanine Creditors and (if party to the Intercreditor Agreement)
Subordinated Creditors should be specified here.
Mezzanine cure rights:Upon the occurrence of a Senior Default which is remediable (other than
certain insolvency-related events of default)22, the Mezzanine Creditors will
have the option to remedy that default within certain grace periods of between
• business days (in relation to a payment[ or financial covenant] default) and
• business days (in relation to other defaults) (each a cure period), as set out
below23.
The Mezzanine Creditors must advise the Senior Agent, promptly and in
any event within • business days of receipt by them of notice of default, by
irrevocable notice if they intend to exercise their cure rights. If the Senior
Agent is so advised, then the relevant Mezzanine Creditor(s) will be obliged to
effect the relevant cure within the applicable periods as set out in the previous
paragraph and, in the meantime, the Senior Agent will be required to hold in
escrow any funds otherwise distributable to the Mezzanine Creditors (or to
creditors ranking behind the Mezzanine Creditors).
[If the Mezzanine Creditors are taking all necessary steps to remedy the relevant
default (other than a payment default) which will take longer than the relevant
cure period to effect as a result of factors beyond their reasonable control,
then the relevant cure period will be extended by a period of • [days/months][,
except for any breach of a financial covenant, in which case the relevant cure
period will be extended by a period of • business days24] .
The cure rights with respect to payment defaults and financial covenants
will be for a maximum of • consecutive quarters or a total of • times during
the life of the Senior Facility. There will be no limit on curing other defaults
(unless and to the extent that the Senior Borrower’s cure rights are themselves
limited)25.
Any cure payment made by the Mezzanine Creditors will be treated as forming
part of their Mezzanine Debt and the total amount in aggregate owed by the
Senior Borrower to HoldCo and by HoldCo to the Mezzanine Borrower under
the relevant Interco Loans will be increased by an equivalent amount.
The list of relevant Senior Defaults is a matter for negotiation. It may be, for example, that only financial covenant and payment defaults
will be curable by the Mezzanine Creditors.
23
This mechanism envisages that the relevant periods should start by notice, rather than the occurrence of a relevant default event. This
promotes the cure mechanism as a properly timed process with a view to achieving the intention of such a mechanism (which is to
afford the Mezzanine Creditors the option to cure). The precise periods will be a matter for negotiation and may vary according to the
nature of the Senior Default in question.
24
This may not be required if the original cure periods are considered long enough.
25
The precise numbers of permitted mezzanine cures for particular categories of default will be a matter for commercial negotiation
between the parties.
22
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Option to purchase
the Senior Loan:At any time following the occurrence of a [Material] Senior Default which
is continuing26, the Mezzanine Lenders will have the right (exercisable for a
period of up to • days from the date on which the Senior Agent first serves
a copy of the notice of the relevant Senior Default on the Mezzanine Agent)
on notice to purchase the Senior Debt (a Purchase Event) at par (including
any capitalised interest, expenses or other amounts27) plus accrued interest,
any swap breakage costs28, funding breakage costs incurred by the Senior
Creditors as a result of the transfer, the reasonable costs of the Senior Lender(s)
in respect of the purchase and all other amounts payable by the Obligors to
the Senior Creditors (but excluding any prepayment fees and default interest).
Valuations:
The parties should consider whether or not to include provisions regarding the
calling of updated valuations in respect of the underlying properties in order
to avoid unnecessary or duplicated costs being incurred. The matters to be
covered should include (a) the timing of new valuations and (b) the costs of
valuations.
Restrictions on
enforcement: Prior to the Senior Discharge Date, the Mezzanine Creditors are not permitted
to take or require the Senior Agent to take (in each case, directly or indirectly)
any Enforcement Action in respect of the Shared Security. They may however,
in certain circumstances as described below, be permitted to take enforcement
action in respect of the Mezzanine Security.29
The Interco Lenders are not permitted to take any enforcement action in
respect of the Interco Loans. However, the Interco Lender(s) will be required
to take such enforcement action as the Senior Agent may direct or otherwise
require.
Permitted Mezzanine
Enforcement Action:Following the occurrence of an event of default under the Mezzanine Facility
Agreement or the commencement of Enforcement Action by the Senior
Creditors, the Mezzanine Agent (acting on the instructions of the Majority
Mezzanine Lenders) may, after giving • business days’ notice to the Senior
Agent, enforce the Mezzanine Security and dispose (or concur in the disposal)
of the shares in the Mezzanine Borrower and/or HoldCo and the receivables
under the relevant Interco Loans and/or Subordinated Loans to a third party
(an Acquisition Party, and any such acquisition an Acquisition). Where the
Acquisition Party is a Permitted Acquirer and wishes to take advantage of the
provisions applicable to Permitted Acquirers this will be subject to compliance
with the conditions set out below.30
A Permitted Acquirer is any one of: (a) an original Mezzanine Lender; (b) an
entity nominated by an original Mezzanine Lender which is wholly owned and/
or directly or indirectly controlled by the Mezzanine Lender (or advised by
A “Purchase Event” may also include any amendment by the Senior Facility which extends the term of the Senior Loan. The precise
scope of Purchase Events will be a matter for negotiation between the parties.
27
As noted above, this may include Property Protection Loans already advanced or deemed to have been advanced.
28
The parties should ensure that they fully understand the terms and tenor of the hedging to ensure that they are aware of costs which
may be charged under this provision if the right to purchase is to be exercised (including whether swap liabilities may still exist at loan
maturity). The Senior Creditors should therefore disclose the key terms of applicable hedging and the Mezzanine Creditors should
ensure that they understand how this may change.
29
The Mezzanine Lenders have no other right to take enforcement action with respect to the Shared Security (i.e. there will be no concept
of permitted enforcement of the Shared Security on the instruction of Mezzanine Creditors after a standstill period).
30
The Mezzanine Lender must take into account the effect of any such Acquisition on the property management arrangements and duty
of care agreements. In particular the Senior Creditors will have a veto on the identity of any new property manager.
26
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a fund which is the adviser to a Mezzanine Lender); or (c) any other person
which becomes a Mezzanine Lender subject to the consent of the Senior Agent
(acting on the instructions of [all/the Majority] Senior Lenders). A Mezzanine
Lender may wish to seek pre-approval of a White List of potential Permitted
Acquirers where they would not otherwise fall within the definition of that
term.
The completion of the Acquisition by a Permitted Acquirer in accordance
with the conditions set out in the Intercreditor Agreement should specifically
override a mandatory prepayment event or a Senior Default under the Senior
Facility Agreement which would otherwise occur as a result of a change of
control.
A Permitted Acquirer must comply with all KYC requirements of the Senior
Creditors, accede to the Intercreditor Agreement as a Subordinated Creditor
(or otherwise subordinate all liabilities owed to it to the satisfaction of the
Senior Agent) in respect of any liabilities owed to it by any Obligor and,
upon completion of an Acquisition by a Mezzanine Lender (or by any entity
owned, controlled and/or advised by it, as set out in the definition of the term
‘Permitted Acquirer’), the relevant Mezzanine Lender will cease to have certain
rights under the Intercreditor Agreement, including those rights described
under “Amendments and waivers”, “Mezzanine cure rights” and “Permitted
Mezzanine Enforcement Action” above and will cease to benefit from the
Shared Security (although they may continue to benefit from, and be bound
by restrictions relating to, the Mezzanine Security).
The parties should carefully consider which rights should no longer apply:
the Mezzanine Lender has effectively stepped into the shoes of the Senior
Borrower’s group and should not thereafter have “additional” rights to those
which the Senior Borrower has had from day one. However, the Senior
Borrower’s rights to cure should remain.
If the Mezzanine Security is enforced, and the ownership of the Senior Obligors
is changed to an entity other than a Permitted Acquirer, this may cause a
“change of control” Senior Default. The parties should carefully consider if
they would wish to suspend the operation of such a default by, for example,
cash collateralising the Senior Debt pending further action.
Grace period: Following the occurrence of a Senior Default (other than a Senior Default
which occurs as a result of an insolvency event in relation to the Borrower or
any other [Material] Senior Obligor31), the Senior Lenders may not instruct the
Senior Agent to take Enforcement Action:
(a)if, within the relevant grace period and to the extent that the Mezzanine
Lenders have the right to cure, the Mezzanine Lenders make a cure
payment in full to cure, or otherwise cure, such Senior Default;
(b)in respect of any Purchase Event, from the date of a purchase notice in
respect of such Purchase Event until the completion of the purchase or
the expiry of the purchase notice; or
(c)if enforcement action with respect to the Mezzanine Security has
The parties should consider whether or not it is appropriate to include all insolvency-related events of default here. It is possible to cure
certain technical insolvencies by an injection of funds or capitalisation of shareholder debt. In addition, the question of what is or may
be a Material Obligor is one for negotiation.
31
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COMMERCIAL REAL ESTATE FINANCE COUNCIL EUROPE
DRAFT INTERCREDITOR GUIDELINES
commenced, the Mezzanine Lenders have complied with the obligations
described under “Permitted Mezzanine Enforcement Action” above and
the Acquisition completes by no later than • business days after receipt
by the Senior Agent of notice of the intention to effect an Acquisition,
provided that this restriction (c) does not apply in respect of (i) the
occurrence of a Senior Default which is continuing and which is not
capable of being remedied within • business days after completion
of the Acquisition or (ii) any enforcement action taken by the Senior
Agent or a Senior Lender if it reasonably believes the Shared Security
to be in jeopardy.
Other than set out in this paragraph, “Grace period” and in “Permitted
Mezzanine Enforcement Action” above, the option to purchase the Senior
Facility and the right to enforce the Mezzanine Security shall not restrict the
Security Agent from enforcing the Shared Security pursuant to the instructions
of the [Majority] Senior Lenders.
Release of Mezzanine and
Subordinated liabilities:If the Senior Agent takes Enforcement Action prior to the Senior Discharge
Date, the Senior Agent may instruct the Subordinated Creditors to take certain
action, including action in order to release all or part of the Subordinated Debt
and any security granted for any such liabilities.
If the Mezzanine Agent takes any Enforcement Action in relation to the firstranking share pledge over the shares in the Mezzanine Borrower for the
purposes of the Acquisition only, the Mezzanine Agent may instruct the
Subordinated Creditors to take certain action in relation to the relevant
Subordinated Loan, including action in order to release all or part of the
liabilities under it and any security granted for any such liabilities.
The Senior Agent may release any of the security securing (and/or related
claims and liabilities of any Senior Obligor evidencing) the Mezzanine Debt
(other than the Mezzanine Security) Interco Loans for the purposes of the
enforcement or realisation of any security in respect of the Senior Facility
and the proceeds of any such enforcement or realisation must be applied in
accordance with “Order of application of proceeds – Shared Security”.
In connection with any such release the documentation should include a
mechanism to ensure that the Mezzanine Lender’s rights to any surplus rank
ahead of any other subordinated or unsecured claims against the relevant
borrower entities.
Cross default provisions:An event of default under the Senior Facility will cross-default the Mezzanine
Facility but not vice versa.
Representations:Non-repeating basic representations regarding capacity, authority and
authorisation will be provided by each party.
Consultation:The Senior Lenders will consult with the Mezzanine Lenders (without need for
their approval) before taking any formal step to exercise any remedy against
the Obligors or taking any Enforcement Action. Any such consultation period
will be for a maximum of • days.
If the Senior Agent and/or Senior Lenders considers (acting reasonably) any
part of the Shared Security to be in jeopardy, or is of the opinion (acting
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COMMERCIAL REAL ESTATE FINANCE COUNCIL EUROPE
DRAFT INTERCREDITOR GUIDELINES
reasonably) that urgent action is required in order to enforce the Shared
Security, no such consultation will be required. In these circumstances the
Senior Agent will advise the Mezzanine Lenders of the relevant action taken
and the reasons therefor.
Transferability:Subject to the terms of the Senior Finance Documents or the Mezzanine
Finance Documents, as applicable, the Senior Lenders and Mezzanine Lenders
may freely transfer or assign their interests in the relevant Debt and the Senior
Finance Documents or Mezzanine Finance Documents, respectively, to any
person provided that:
(a)the transferee accedes to the Intercreditor Agreement; and
(b)the assignment or transfer to that person will not, as at the date of that
assignment or transfer, result in any deduction or withholding for or on
account of tax being required by law to be made from a payment under
the Senior Finance Documents or Mezzanine Finance Documents.
Notwithstanding the above, neither the Senior Lenders nor the Mezzanine
Lenders may transfer their respective interests to a Borrower or any affiliate of
a Borrower without the consent of the other [Finance Parties/Lenders].
Governing law:
English.
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COMMERCIAL REAL ESTATE FINANCE COUNCIL EUROPE
DRAFT INTERCREDITOR GUIDELINES
Mezzanine Security comprises:
Shared Security comprises:
(a)share pledges over HoldCo and
Mezzanine Borrower;
(a)registered mortgages;
(b)
security over HoldCo Loan; and
(c)floating charge over all assets of
TopCo and Mezzanine Borrower.
(b)
share pledge over Senior Borrower;
(c)security over rental account and other
bank accounts
(d)
security over PropCo Loan; and
(e)floating charges over all assets of
HoldCo and Senior Borrower.
SPONSORS
TopCo
Mezzanine Security
100%
Mezzanine Loan
Mezz Agent
Mezzanine Borrower
Mezzanine Hedge
HoldCo Loan
Mezzanine Lenders
Mezz Hedge
Counterparty
100%
Security Trustee
HoldCo
Shared Security
PropCo Loan
Benefit of
transaction
Security
100%
Senior Borrower
(PropCo)
Senior Loan
Senior Lenders
Senior Agent
Senior Hedge
Senior Hedge
Counterparty
Properties
17