Fitch: US First, Second-Lien Tug-of-War Affects Restructuring

NEW YORK--(BUSINESS WIRE)-- The tug-of-war between first- and second-lien lenders is influencing the current restructuring landscape for U.S. leveraged loans, according to Fitch Ratings. Negotiation points have varied substantially, depending on the specific documentation included in credit, collateral, and intercreditor agreements.

Second-lien loans are a common component in the capital structures of leveraged names; 26% of the issuers within the U.S. institutional leveraged loan market have second-lien debt. The security interest provided by the collateral makes second-lien loans more appealing for investors than unsecured notes.

An intercreditor agreement is the backbone defining the relationship between first and second lien lenders. Typically in an intercreditor agreement, second-lien lenders can contract away certain rights including the right to contest debtor-in-possession (DIP) financings already accepted by the first-lien lenders, certain rights associated with plan confirmation cramdown, the right to provide DIP financings without the consent of the first-lien lender, and the right to contest Section 363 sales already accepted by the first-lien lenders. The strength of second-lien lenders' claims in bankruptcy hinges largely on what rights they contracted away.

However, second-lien lenders normally retain a set of unsecured creditors' rights carved out in the intercreditor agreement. The breadth of the carveouts can substantially affect the rights of first-lien lenders in case of bankruptcy. A broad carveout can give second-lien lenders rights that are otherwise abrogated by the intercreditor agreements.

The recent court decision regarding Momentive highlighted the importance of a clearly drafted intercreditor agreement when considering distinct creditors' rights in bankruptcy proceedings. The Momentive decision is the latest of several relevant cases illustrating that not all second-lien loans are created equal. The strength of drafting language and compromises clearly delineated in the intercreditor agreement can result in different outcomes for second-lien lenders in bankruptcy.

First-lien lenders usually bear the burden of providing clearly drafted clauses. Second-lien lenders are likely to be given more creditors' rights than originally negotiated for when there is ambiguity in interpreting the extent of waivers and compromises reached between first- and second-lien lenders.

The traditional first-lien/second-lien structure usually has separate sets of documents for each lender in the structure. On the other hand, unitranche loans are a variation of first-lien/second-lien loans and combine senior and junior tranches into one single tranche with one set of documents. Therefore, in terms of intercreditor negotiations, the traditional first-lien/second-lien structure affords more flexibility than unitranche loans but the unitranche loans offer simpler documentation and lower transaction cost.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Intercreditor Arrangements (Tug-of-War Between First-Lien and Second-Lien Lenders)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863050

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151117006774/en/

Fitch Ratings
John Shen-Sampas
Director
U.S. Leveraged Finance
+1 212-612-7881
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Michael Paladino, CFA
Managing Director
U.S. Leveraged Finance
+1 212-908-9113
or
Kellie Geressy-Nilsen
Senior Director
FitchWire
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Alyssa Castelli, +1 212-908-0540
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Source: Fitch Ratings

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