Posted on April 13, 2010 by Susan Alker

Second Liens Really are Second

With the increase in corporate bankruptcy filings over the past year, there have been some interesting bankruptcy court decisions that affect those of us on the front end in corporate lending.  One recent case took up the question of whether a second lien is truly second -- and whether it is safe to expect that the terms of your intercreditor agreement will be enforced.  

In an intercreditor agreement, the senior lender will usually require that the junior lender waive several of its rights, including

  • the right to challenge the validity or priority of the senior lender's liens, and
  • the right to oppose a plan of reorganization supported by the senior lender. 

The intercreditor agreement in the ION Media case, as is common for an agreement of this type, included a broad waiver of these and other rights.  In the agreement, the junior creditor agreed that its rights to the company's assets would be junior, and the relative priorities of the lenders' claims would not be affected or impaired by "any nonperfection of any lien purportedly securing" any of the senior obligations.  However, in the bankruptcy case, the junior creditor took issue with these terms, and argued that some of the assets weren't "collateral" as defined in the intercreditor agreement -- so the waiver should not apply.  The bankruptcy court disagreed, deciding instead to enforce the waiver as written. 

When we draft these kinds of waivers in intercreditor agreements, this is exactly the type of situation we are trying to address:  if it turns out that there's a problem with the senior lender's lien (perhaps liens as to some of the collateral don't appear to have been properly perfected, for example), the junior lender is still supposed to remain in the junior position.  These terms help  ensure that the senior lender actually receives the benefit of its senior position.  And this agreed-upon allocation of risk affects many other elements of the lending relationship for both creditors -- including loan pricing.  Junior creditors typically receive significantly higher rates of return than senior lenders, due to the higher level of risk they take on.

Until now, we were pretty sure that all these provisions worked, but we didn't have the benefit of a published case on point.  It is helpful for both junior and senior creditors to have more certainty here.

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Posted on September 24, 2009 by Susan Alker

Finding Financing in a Difficult Market

Last week, our firm hosted a workshop at the annual conference for the Los Angeles chapter of the Association for Corporate Growth (ACG).  Our topic was “Finding Financing in a Difficult Market”.  No one in the room needed to be convinced that the market is indeed difficult these days. 

Our workshop was focused on trying to find the few bright spots in the market.  There was a senior lender on the panel, who indicated that the market for senior loans may not be quite as dead as people seem to think.  For example, the ABL market continues to be active and can be a good source of funding for underperforming companies that have valuable assets.  On the cash flow side of the house, there are some borrowers that the banks would like to loan money to, but many of those companies seem to be on the sidelines waiting for the market to change. 

Our experience in recent months has been that senior loans are still available in some situations, but for a number of companies this kind of financing can be hard (or impossible) to find.  Within this constricted market, we’re still seeing acquisitions and other types of deals getting done, but rather than relying solely on senior financing, most seem to involve a combination of sources of funds, including equity, mezzanine and sometimes various forms of second-lien/mezz hybrid financing. 

We’ve seen the role of mezz lenders in corporate acquisitions dramatically increase in the last few months.  In the workshop, I described a recent deal to acquire a middle market manufacturing company.  The private equity fund relied on a combination of equity financing, a structurally subordinated loan to the holding company, a small senior revolving loan for working capital, and a secured mezzanine loan that looked much like a second-lien loan. Piecing together financing from various sources –with some very complex intercreditor arrangements – got the deal done.

My corporate partner John Iino discussed a major trend that our mergers and acquisitions practice is seeing:  an increase in deals being done on an all-equity basis, without a debt component.  This is the only way to go when debt financing is unavailable.  Many of the acquisitions are strategic combinations.  And it's not uncommon to see the equity funding for companies (and transactions) come from foreign investors.

It will be interesting to see where the market takes us in the next few months.

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