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UNITRANCHE FINANCING AND
SECOND LIEN LOANS
Carolyn Alford, King & Spalding
Sarah Borders, King & Spalding
Alfredo Cantoral, AllState
Randall Klein, Goldberg Kohn
April 30, 2015
ACIC Spring Investment Forum
Unitranche v. Other Financings
• 1st Lien/2nd Lien Debt
• Subordinated Debt
• Mezzanine with a Lien
• Unitranche Debt
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1st Lien/2nd Lien Financing
• Two separate groups of lenders
• Two separate agents
• Two sets of loan documents
• Two liens
• One common collateral pool
• Lien subordination
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Subordinated Debt Financing
• Two separate groups of lenders
• Two agents
• One Lien in one collateral pool in favor of
senior lender
• Sub Debt lenders are generally unsecured
• “Mezz with a lien”
• Payment subordination
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Unitranche Financing
• Single debt agreement with borrower, with single
set of covenants
• Single set of collateral documents
• Single collateral pool
• Single agent
• Multiple forms of unitranche
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Evolution of the Unitranche Product
• History
• Size of Market
• Players
• Trends
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Advantages of Unitranche
• Speed of Transaction
• Certainty of Closing
• Reduced Closing Costs
• Post-Closing Administration Simplicity
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Disadvantages of Unitranche
• Less established market and no model forms
• More “Last Out” friendly
• Less precedent for assessing enforceability
• Syndication complications
• Bankruptcy complications
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Agreement Among Lenders (AAL)
• Separate agreement that creates separate “first
out” and “last out” tranches of the unitranche
• Reallocation of interest between lenders
• Payment waterfall
• Voting rights of lenders
• Purchase option
• Remedy standstill
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Evaluating Unitranche Risk
• Borrower are often not a party to AAL.
• Agent’s hold in each tranche is important.
• Enforceability of AAL, in and out of bankruptcy,
is less certain.
• Risk of “secret agreement”.
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Waterfall
• Prior to trigger event, payments are allocated
per the debt agreement (subject to interest/fee
skim).
• After trigger event, AAL reallocates all
collateral proceeds and all payments received
post trigger to affect first out/last out priority.
Agent fees and expenses paid first, followed by
all first out amounts, and finally all last out
amounts.
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Waterfall
Trigger events are highly negotiated, and often
include:
• Payment default
• Bankruptcy
• Financial covenant default (sometimes an earlier
trigger than default)
• Commencement of exercise of remedies
• Failure to timely deliver a borrowing base
certificate (ABL deals).
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Voting Rights
• Amendments generally are Required Lenders
vote (subject to sacred rights).
• Required lenders may require more than 50% of
the entire facility (in which case the larger
tranche controls).
• AAL may override required lender votes to
require a majority of first out lenders and a
majority of last out lenders.
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Voting Rights
• AAL may also include a list of items requiring
approval of all lenders.
• Upon a trigger event, majority of first out
lenders may control amendments on certain
aspects of the debt documents.
• Trigger events may include payment default,
bankruptcy default, or exercise of remedies, with
delivery of notice to the relevant tranche.
• Affiliate lender and defaulting lenders
complicate voting further.
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Exercise of Remedies
• Debt agreement may provide that a majority of
lenders control remedies (which would mean the
larger tranche controls) or that a majority of
either class or both classes is required to institute
remedies.
• Control over remedies may change based on
trigger events.
• Standstill Periods:
• First Out Lenders
• Last Out Lenders
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Bankruptcy Risks
• Less precedent on enforceability
• Post-petition interest, fees & expenses
• Classification of claims and voting on a
bankruptcy plan
• Credit bidding
• Sale of assets
• DIP financing/use of cash collateral
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Purchase Option
• Provides last out lenders with right to purchase the
first out obligations upon the occurrence of certain
trigger events.
• First out lenders may have a limited right to
purchase the last out obligations.
• Principal way to resolve disagreement on how to
proceed in a restructuring/workout.
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Assignability
• Consent rights
• Agent
• Borrower
• Right of first offer/Right of first refusal
• Cross over lender issues
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