Intercreditor Agreement “Claws”

Posted on 10-31-2016 by
Tags: Lexis Practice Advisor , Practice Insights , intercreditor agreement

Many intercreditor agreements include the agreement of the first lien lender to sell the first lien debt to the second lien lender under certain circumstances. This is extremely common in straight first lien/second lien intercreditor agreements, whether the second lien lender is a specialty lender or are institutional term loan lenders. The buyout option is a means to address concerns of a second lien lender about the degree of control the first lien lender may have when the borrower is in distress, as a result of the standstill or the obligation of the second lien lender to release its subordinate lien upon the sale of the collateral. With the buyout option, the second lien lender has the right to take complete control of a workout or bankruptcy by purchasing the first lien debt if it does not think that the first lien lender is getting enough value for the collateral or otherwise does not like the strategy adopted by the first lien lender. If the second lien lender believes that it could realize more from the sale or other disposition of the collateral than the first lien lender can, the second lien lender can pay out the first lien lender and handle the sale and other disposition of the borrower’s assets as it determines. For some second lien lenders, this option is not realistic because it may not have the funds available to it for such purpose or it may not have, or may not want to devote, the institutional resources to handle a workout or liquidation.

See below for a portion of a sample provision from our new guide covering the second lien lenders’ purchase option. Our intercreditor agreement clauses contain optional and alternate clauses and important drafting notes and negotiation tips.

Purchase Option Clause (First Lien/Second Lien Intercreditor Agreement)

Introduction: Section 5.8(a) sets forth the second lien lenders’ purchase right and the events triggering this right. Sections 5.8(b) through 5.8(e) set forth additional mechanics for the purchase and sale and certain related issues (which are in many ways analogous to those arising in the context of a payoff of loans such as treatment of letters of credit and hedging agreements, indemnities and representations). Where there is a first lien cap, the second lien lenders may argue that, in exercising the purchase right, they should only be required to purchase amounts of the first lien obligations within the cap. The first lien lenders, however, can be expected to strongly resist this suggestion, since they will be reluctant to have ongoing credit exposure to a facility controlled by the second lien lenders.  Where the parties agree that the purchase right will be subject to the first lien cap, this section will need to be modified accordingly.

Section [5.8]. Purchase Option.

(a) Without prejudice to the enforcement of remedies by the First Lien Secured Parties, following (x) the acceleration of any of the First Lien Obligations or (y) the commencement of any Insolvency or Liquidation Proceeding with respect to any Grantor, then, in either such case, any one or more of Second Lien Secured Parties (acting in their individual capacity or through one or more affiliates) shall have the right, but not the obligation (each Second Lien Secured Party having a ratable right to make such purchase, with each Second Lien Secured Party’s right to purchase being automatically proportionately increased by the amount not purchased by another Second Lien Secured Party), upon five Business Days’ advance written notice delivered by the Second Lien Collateral Agent to First Lien Agent (a “Purchase Notice”), for the benefit of First Lien Secured Parties, to acquire from First Lien Secured Parties all (but not less than all) of the right, title, and interest of First Lien Secured Parties in and to the First Lien Obligations (including unfunded commitments).  The Purchase Notice, if given, shall be irrevocable.

[Drafting Note to Section 5.8(a): Examples of less common events that may be triggers for the second lien lenders’ purchase right include:

(1) a payment default in respect of any First Lien Debt that is not cured within [30] days after such occurrence; and

(2) “the commencement by the First Lien Collateral Agent of any Enforcement Action [in respect of all or a material portion of the Collateral].”]

(b) On the date specified in the Purchase Notice (which shall not be more than five Business Days after the receipt by First Lien Collateral Agent of the Purchase Notice), the First Lien Secured Parties shall sell to the purchasing Second Lien Secured Parties, and the purchasing Second Lien Secured Parties shall purchase from the First Lien Secured Parties, the First Lien Obligations; provided, however, that the First Lien Obligations purchased shall not include any rights of First Lien Secured Parties with respect to indemnification and other obligations of the Grantors under the First Lien Loan Documents or under the Secured Hedging Agreements or the Secured Bank Product Agreements, in each case that are expressly stated to survive the termination of the First Lien Loan Documents, the Secured Hedging Agreements or the Secured Bank Product Agreements.

Lexis Practice Advisor:  To see additional drafting notes and optional clauses to this provision, and many others, visit Lexis Practice Advisor. Click this link for a free 7-day trial.

Your comment has been posted.   Close
Thank you, your comment requires moderation so it may take a while to appear.   Close