LEVERAGED FINANCE QUARTERLY

First out or super Most first out facilities include simple

turnover provisions with respect to proceeds
received in contravention of the waterfall
provision, while others include highly

seniors – same negotiated and bespoke intercreditor terms.

Super seniors do not benefit from
subordination provisions, although they do
benefit from turnover provisions which

difference? capture certain recoveries, typically with

respect to collateral.
First out facilities should recover in priority
to other senior secured debt in Chapter 11
The similarities and distinctions between typical proceedings. Super seniors, on the other
hand, would not automatically take priority
features of first out revolving credit facilities in the US, over other pari passu debt in a bankruptcy
and super senior revolving credit facilities in Europe process in Europe. Instead, they are
structured on the premise that in a default
What is it? A standard super senior or first out scenario there will be an enforcement of a
Labelled ‘first out’ in the US and ‘super waterfall provision provides that: single share pledge which captures the entire
senior’ in Europe, this is a revolving credit • the obligations under the super senior or value of the group as a going concern, and
facility (RCF) which has priority over other first out facility have top payment priority thereby enables a lender-driven financial pre-
pari passu debt in relation to the proceeds of (except for payment of certain pack outside of formal bankruptcy
enforcement of collateral and, in the US, enforcement-related and other amounts proceedings.
guarantee recoveries. owing to agents of the pari passu creditors
First out facilities in the US are relatively in their capacities as such); and, Control over enforcement
uncommon and appear most often in middle- • following payment in full of the super A key issue for structures involving first out
market financings and restructurings. The senior or first out obligations (and the and super senior facilities is who controls
terms of first out facilities are often deal enforcement-related and agent enforcement actions. A balance must be
specific. By contrast, super seniors are a well obligations, if any), any remaining struck between the interests of a relatively
known component of a leveraged capital proceeds are allocated to the other pari small and well-insulated first out/super
structure in the European market, and the passu obligations. priority class of revolving lenders, and the
terms are more settled. Depending on the context, a first out interests of the larger and more exposed class
facility may be documented in the same or a of term loan lenders or bond investors.
How does it work? separate facility agreement, whereas super
Super seniors typically appear beside pari seniors typically appear in their own First out position – US
passu senior secured bonds. First out facilities, standalone agreement. Waterfall priority and First out facilities have generally provided that
on the other hand, commonly co-exist with associated provisions are documented either enforcement actions, whether pre-bankruptcy
pari passu term loans and/or pari passu senior in an intercreditor agreement (in bank/bond or during an insolvency or bankruptcy
secured bonds. structures, and where the first out/super proceeding, are controlled by lenders holding
The primary feature of super senior or first senior is documented in a separate a majority of all senior secured obligations
out facilities across both markets is waterfall agreement) or a combined facility agreement. (that is, not the first out obligations).
priority. That is, priority with respect to the Importantly (especially for a US However, as evidenced by certain recent
application of proceeds of collateral following bankruptcy analysis), first out/super senior US transactions, this default position in
an enforcement of collateral and, in the US, facilities do not have their own first priority favour of the larger senior secured creditors
guarantee recoveries. The super senior or first lien, which a first lien lender would have in a has been increasingly circumscribed. First
out tranche is paid from the enforcement first/second lien structure. Instead, all pari out lenders are becoming more focused on
proceeds (including, in the case of first out passu creditors share the same grant of limiting dilatory enforcement by the term
facilities, enforcement recoveries in a Chapter collateral (and guarantees) with the result that loan lenders or bond investors holding a
11 bankruptcy process) before other pari in Chapter 11 proceedings first outs would majority of all senior secured obligations.
passu debt tranches that are secured by the typically vote in the same class as the senior A few first out transactions in recent years
same collateral. secured lenders. have even flipped the traditional priority of
creditors by providing the first out revolving
tranche with exclusive control of enforcement
Leveraged finance quarterly actions, while the holders of term loans or
In this quarterly feature, Milbank’s leveraged Contributions from partners on both sides of bonds were left in the more junior position of
finance group distil, compare and contrast the Atlantic will look at loans and bonds, with having to accept a more passive role.
key features of the US and European large-cap or big sponsor-backed LBO A compromise is to include a short
leveraged finance markets. documentation in mind. enforcement standstill period (for example,
It will shine a light on the legal blindspots that The next contribution, which will focus on 90 to 120 days) following the expiration of
have arisen as markets and products intercreditor agreements, will appear in the which, if the term debt holders are not
converge, and as companies increasingly look December/January edition of IFLR magazine. exercising remedies, the first out revolving
to structure transatlantic deals. lenders are able to step into direct remedial
action.

22 IFLR/September 2013 www.iflr.com

 LEVERAGED FINANCE QUARTERLY

Further, first out structures have begun super senior lenders or majority senior If, however, either this minimum period
incorporating increasingly fulsome secured bondholders may initiate has elapsed and the senior secured
intercreditor provisions. Additional enforcement by notice to the security agent. bondholders have taken no enforcement
protections include: Following this, the super senior lenders and action , or, at the end of this period, the
(a) prohibitions on additional liens in senior secured bondholders are required to super senior liabilities have not been repaid
favour of other creditor groups and consult with each other as to the manner of in full, then the super senior lenders can
incurring other pari passu debt above a enforcement for a specified consultation seize control of enforcement by notice to
certain threshold; and, period. This is the case, unless certain the security agent. In this situation, the
(b) requirements to: circumstances apply. For example, if an security agent would, going forward, be
i. (as far as reasonably practicable) insolvency event has occurred or the obliged to act in accordance with
notify the non-enforcing creditors of creditors’ representative(s) who initiated instructions as to enforcement from the
enforcement of shared collateral; enforcement reasonably believes that no majority super senior lenders.
ii. consult in good faith with the non- consultation period or a shorter In all cases, the enforcement instructions
enforcing creditors prior to and consultation period is necessary to avoid must comply with the enforcement
during such enforcement action; materially impairing the ability to effect principles. Such principles will typically
and, enforcement, or the value which would be provide that the proceeds of enforcement
iii. act and otherwise co-operate with realised on enforcement. must be in cash and sufficient to cover the
the non-enforcing creditors in a After the consultation period, in the super senior liabilities being repaid in full,
commercially reasonable manner in event the security agent receives conflicting and that the sale price must be supported by
any enforcement of shared collateral. instructions as to enforcement from the a fairness opinion.
super senior lenders and the senior secured The table below summarises the key
Super senior position – Europe bondholders, the majority senior secured documentary differences between first outs
The European position on enforcement bondholders would typically be the and super seniors.
rights differs from that of the US in certain controlling party for a certain period (for By Milbank partners Suhrud Mehta in
respects. Generally, either the majority example, three to six months). London and Lauren Hanrahan in New York

Feature US – first out Europe – super senior

Waterfall priority ✓ ✓
(collateral and guarantees) (typically only collateral)

Equal ranking ✓ ✓

Documentation Most commonly documented as a separate Separate revolving facility agreement with own
revolving tranche under the facility agreement covenants and default triggers, and consistent
as the pari passu term debt. However, if the with terms of senior secured bonds (but usually
other pari passu debt consists of notes, the first goes further by incorporating a maintenance
out facility will be documented in its own facility financial covenant, additional information under-
agreement. takings, and events of default).

Mandatory prepayments As is customary for US-style revolving credit Will typically include mandatory prepayment
facilities, a first out facility does not generally upon a change of control and sale of the group.
include mandatory prepayment provisions, May also include mandatory pre-payment of:
although certain deals have made exceptions, (i) a percentage of flotation proceeds;
especially with respect to asset sale and (ii) insurance proceeds; and,
insurance proceeds. (iii) acquisition/report proceeds.

In the case of (ii) and (iii), this is subject to certain

carve outs and only to the extent not reinvested
in the business.

There will either be no requirement to prepay the

proceeds of asset disposals, or such provision
will mirror the asset sales covenant in the bonds.
Prepayments are also required to meet the Note
Purchase condition described overleaf.

www.iflr.com IFLR/September 2013 23

LEVERAGED FINANCE QUARTERLY

Feature US – first out Europe – super senior

Note/Term Loan Purchase condition Not applicable. Rarely, voluntary prepayments Typically includes a covenant preventing a
of term loans may be prohibited after an event of member of the group from prepaying/repur-
default. chasing/redeeming (a Note Purchase) any
bonds or other senior secured debt unless no
event of default is outstanding and:
(i) immediately following such Note Purchase,
the aggregate principal amount of all Note
Purchases since the closing date is less than
a threshold amount or percentage of the
original amount of the bonds/senior secured
debt; or,
(ii) to the extent that the principal amount of all
Note Purchases is in excess of the threshold
amount, there is a reduction of the principal
amount outstanding under the revolving
facility. Options include a requirement for:
pro rata prepayment and cancellation;
prepayment and cancellation in an equal
amount; or, full repayment and cancellation.

Maintenance financial covenants May contain financial covenants customary for Typically, a leverage ratio (tested quarterly)
US revolving credit facilities, including, for accompanied in some cases by a cashflow
example, a maximum leverage ratio, and cover ratio and/or a restriction on incurrence of
possibly a minimum interest coverage ratio. capital expenditure. Alternatively, only a drawn
RCF leverage ratio may apply, which is tested
only when the RCF is in fact drawn on a quarterly
test date.

Information undertakings Standard undertakings in a US leveraged loan Similar to the US market and also includes KYC
agreement, including requirements to provide: [know your customer] information.
annual, quarterly and (possibly) monthly
financial statements; a quarterly compliance
certificate; an annual budget; notification of a
default; and, certain other information
(including, for instance, documents dispatched
to shareholders, details of material litigation, and
such other information as lenders may
reasonably request regarding the financial
condition, assets and operations of the group).
Some first out facilities also require periodic
reporting regarding the outstanding amount of
the other pari passu debt.

“
“
I value the IFLR because of the range of issues it

IFLR covers and the high quality and relevance of its

articles to an international practice.
Ed Greene, former Securities and Exchange Commission
general counsel

24 IFLR/September 2013 www.iflr.com

 LEVERAGED FINANCE QUARTERLY

Feature US – first out Europe – super senior

Events of default: Standard events of default in a US leveraged Typically more extensive than in senior secured
loan agreement including, among other bonds, including (subject to certain qualifica-
common events of default, those arising from: tions and remedy periods): non-payment;
non-payment; breach of transaction breach of transaction documents; misrepresen-
documents; misrepresentation; cross-default; tation; cross-default; insolvency of group
insolvency or bankruptcy of any group member; members; creditors’ process; invalidity and
change of control; material litigation or unlawfulness; cessation of business; change of
judgments and, ERISA [Employee Retirement ownership of material group companies; audit
Income Security Act] or similar material adverse qualification; expropriation;
employment-related events. repudiation/rescission of agreements; material
litigation against the group; pensions; and,
material adverse change.

• Amendments and waivers Standard, as for a US leveraged loan Standard, as for a European leveraged loan
agreement. Typically also includes a class vote agreement. Similar to US entrenched rights with
(or affected lender vote) with respect to respect to modifications to waterfall and
modifying the waterfall provision and other intercreditor provisions.
mechanics of the first out facility.

• Acceleration Lenders holding a majority of the senior secured Lenders holding two thirds of the super senior
obligations. commitments (drawn/undrawn).

Intercreditor terms:

• Payment subordination X X

• Payment blockage X X

• Turnover ✓ ✓

• Enforcement of collateral:

– Who controls Lenders holding a majority of the senior secured Majority (50.1%) of the senior secured creditors
obligations (that is, not the first out obligations). or a majority (66⅔ %) of the RCF lenders
(subject to discussion above).

– Conduct of process Generally controlled by majority of holders of Either class may initiate, but in case of a conflict
senior secured obligations, although there are (following consultation), senior secured bonds
recent examples in the US of the first out lenders control for a period (for example, three to six
controlling enforcement rights. months).

However, super senior may assume control in

accordance with security enforcement
principles if this period has elapsed and no
action is being taken by the senior secured class
or if at the end of such period the super senior
remains outstanding.

The security enforcement principles require

proceeds of enforcement to be in cash and
sufficient to cover super senior being repaid in
full and for sale price to be supported by a
fairness opinion.

www.iflr.com IFLR/September 2013 25