How does the LMA deal with high yield noteholders in its new suite of documents?

The Loan Market Association (LMA) has published new documentation for use in leveraged acquisition finance deals which are funded with both a senior secured facility and high yield notes. How is it envisaged that such a deal will be structured, and what are the key provisions of these new documents?

Original news

A new super senior facility for use with senior secured and high yield notes and associated intercreditor agreement has been issued by the LMA.

What new documents has the LMA published?

The LMA published four documents on 12 November 2014 under the ‘Leveraged/High Yield’ category, adding to the super senior revolving facility agreement and super senior intercreditor agreement (and associated user guides) for leveraged transactions involving senior secured notes and a super senior revolving facility.

The new documents are:

  • super senior multicurrency revolving facility agreement with high yield notes (HY Super Senior Facility Agreement)
  • user guide to super senior multicurrency revolving facility agreement with high yield notes
  • LMA super senior intercreditor agreement with high yield notes (HY Super Senior Intercreditor)
  • user guide to super senior LMA intercreditor agreement with high yield notes

These documents are for use on leveraged acquisition finance deals where the transaction is funded by both senior secured and high yield notes and a revolving credit facility is also required by the group.

The provisions in the new documents generally follow those in the super senior revolving facility agreement and super senior intercreditor agreement published in November 2013 with additional provisions to deal with the high yield notes (see in particular cl 7 of the HY Super Senior Intercreditor).

What deal structure does the new documentation assume?

Funding structure

The HY Super Senior Facility Agreement assumes that a parent company will set up a subsidiary to make the acquisition (the company). The company will acquire the target group.

The company is the borrower under the HY Super Senior Facility Agreement as well as issuing the senior secured notes. The high yield notes are issued by the parent company to the high yield noteholders.

The user guide for the HY Super Senior Facility Agreement describes a fairly typical structure for the equity funding of the company—investment in the parent company is made by way of share capital (ordinary shares and possibly preference shares) and by the issue of loan notes to institutional investors. The parent company subscribes for shares in and makes an intercompany loan to the company. The equity investment, intercompany loan and note proceeds are then combined to meet acquisition costs, and the loans under the Super Senior Facility Agreement are used to fund the group’s working capital and general corporate purpose requirements (which may include acquisition related costs).

In addition, the HY Super Senior Facility Agreement assumes that there may also be a vendor loan note for deferred purchase price (which is subordinated under the HY Super Senior Intercreditor).

Security structure

It is envisaged that the parent company will grant security (Common Security) in favour of the senior secured noteholders, super senior lenders, high yield noteholders and hedge counterparties over its shares in the company and over rights in any intra-group loan. In addition, the super senior lenders, senior secured notes holders and hedge counterparties (Priority Creditors) will also receive additional security (Priority Security) which the high yield noteholders will not have the benefit of (though it is envisaged that the high yield noteholders may receive guarantees from the group).

The rights of the parties will be regulated by the HY Super Senior Intercreditor which also contains all the security trustee provisions.

How are competing interests dealt with in the HY Super Senior Intercreditor?

How is the debt and security ranked?

The HY Super Senior Intercreditor ranks amounts owed by the company and its subsidiaries but does not rank amounts owed by the parent company. The liabilities of the parent company to the noteholders under the high yield notes are described as senior liabilities and are not subordinated in any way. Otherwise, the debt is ranked as follows:

  • first, liabilities under the HY Super Senior Facility Agreement, liabilities under the senior secured notes and hedging debt pari passu
  • second, liabilities to the high yield noteholders, and
  • third, the subordinated liabilities (intra-group liabilities, liabilities to the parent company and amounts owed to the vendor or investors)

The Common Security is described as securing debt to the Priority Creditors in priority to debt owing to high yield noteholders. The Priority Security secures liabilities to the Priority Creditors pari passu. The priority of the super senior lenders is therefore merely a contractual priority conferred by the payment waterfall.

How are proceeds to be distributed according to the payment waterfall?

The HY Super Senior Intercreditor envisages that amounts received by the security agent (including through eg operation of the turnover provision) will be distributed by the security agent as follows:

  • discharging amounts owed to the security agent or any receiver
  • discharging expenses of enforcement
  • discharging liabilities under the HY Super Senior Facility Agreement (or any replacement facility agreement) and hedging liabilities up to a cap (pari passu)
  • discharging liabilities under the senior secured notes (and any additional debt ranking pari passu) and the remaining hedging liabilities, and
  • discharging liabilities under the high yield notes
Are there any restrictions on payments to high yield noteholders?

Subject to certain exceptions, high yield noteholders are not permitted to receive any payments of capitalised interest or principal on their notes unless this is permitted by the senior secured bond documents and the HY Super Senior Facility Agreement (which envisages restrictions on repayment of debt to the parent company and that restrictive covenants relating to—eg financial indebtedness are inserted into the HY Super Senior Facility Agreement from the bond indenture). Other payments are only permitted if there has been no stop notice issued or automatic payment stop following an event of default.

Can the high yield noteholders take enforcement action?

The high yield noteholders are restricted from taking any action against members of the group (except for the parent company), or enforcing any of the Common Security except in very limited situations. In summary, they can:

  • declare liabilities due and payable (but not take further action), and
  • take enforcement action (as defined) if an event of default has occurred and is continuing under the high yield note indenture and a standstill period has expired
Can the high yield noteholders instruct enforcement instructions to the security agent?

The high yield noteholders are permitted to issue instructions to the security agent in relation to the Common Security if the Priority Creditors have not done so or have told the security agent to cease enforcement. This only applies if the high yield noteholders are permitted to take the enforcement action and their instructions can, in any event, be superseded by instructions from the super senior lenders or senior secured noteholders.

Otherwise, the provisions relating to enforcement instructions generally follow the provisions in the LMA super senior intercreditor agreement (though referring to both the Common Security and Priority Security). In summary, the security agent must follow the instructions of the senior secured noteholders subject to a limited number of exceptions in which it must follow the instructions of the super senior lenders. Key exceptions include:

  • failure by the senior secured noteholders to issue instructions as to method of enforcement within a specified amount of time
  • the super senior lenders have not been repaid within a specified amount of time
  • a debtor is insolvent, and
  • the senior secured noteholders have not issued instructions as to method of enforcement and the super senior lenders consider this could have a detrimental impact on recoveries

Miranda Campbell, solicitor in the Lexis®PSL Banking & Finance team.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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