2nd Loan

The majority of mid-market entities are closed by three to five creditors. Formerly a smaller niche dominant by asset-based revolving creditors, SME investment has developed into a broad spectrum of banks, among them hedging fonds established specifically for lending in this area. Whereas part of a SME credit line may still contain an asset-based instalment, the major SME credit lines are likely to contain either one or two instalments of long-term debt.

As soon as the SME Facility started to borrow long-term loan instalments, the Facility adopted some features of major Syndicated Loan Facility. The first and second pledge instalments were incorporated into the facility and recorded in the form of discrete loan and collateral arrangements and an intermediate lender arrangement defining the right between the first pledge and the second pledgee.

The first pledgees and the second pledgees usually have different rights of pledge on the securities with different security applications explaining this Memorandum and the Interim Loan Facility provides that the first pledgees will have precedence over the rights of pledge of the second pledgees on the securities. As a rule, an intermediate lender contract is concluded between the first pledge creditors, the second pledge creditors and the borrowers.

As a rule, the other creditors of the facility are not party to the interim credit facility, but the first and second representatives of the pledge and pledge conclude the interim credit facility in their name. There is a tradition of a first lien/second pledge among creditors that allows the second pledgee to arrange to acquire all the liabilities of the first pledge in the event of non-performance or when the first pledgee begins to seek redress.

Furthermore, a decisive feature of a first lien/secondary lien arrangement is the moratorium of the second representative's right of recourse. An initial pledge requires that the second lienholder must allow some amount of waiting before exercising legal actions against the security (usually 180 calendar days, although may range from 90 to 270 days) before exercising legal actions against the security.

Restraint will be continued if the creditors of the first pledge conscientiously exercise their right and remedy against all or substantially all of the securities. Recently, the players in the medium sized retail banking loan markets have evolved and are making active use of the "unitranche facility" loan document. In contrast to a first pledge and a second pledge, the unit industry is provided under a unique loan contract with a unique sets of safety brief.

In place of a lender contract concluded between the first pledge representative, the second pledge representative and the borrowing party, the lender agreements for a Unitrane Facilities are laid down in a "Contract between Lenders" or an "AAL" between the different creditors of the Facilities. Intermediary lender agreements make available to creditors a first-out and last-out cash flow with a sole pledge on the borrower's security.

Use of the Unitrane credit line is more suitable for a medium-sized business, as it would be too costly if all creditors of a widely-syncritised credit line had to conclude an AAL. unit-industry plants can be set up quickly - quicker than a conventional first and second license plant.

The use of a Unitrane Facilities saves borrowers and creditors from having to negotiate and draft two distinct sentences of credit documentation, which in principle shortens the documentation and completion times of a trade. Since a Unitrane Facilities provides for a singular pledge of the borrower's collaterals, the Unitrane Facilities only require a record of collaterals, which lowers closure overhead.

No " normal " solutions exist to the problems that arise between the first-out lender and the last-out lender in a Unitrant Facilities. Whereas the extent of the questions in question largely relies on the bargaining strength of the first-out and last-out creditors, the AAL usually determines the commercial and coordination agreements between the first-out creditors and the last-out creditors, with the first-out creditors, under certain conditions, having precedence over the last-out creditors.

WHICH ARE THE MAIN ECONOMIC FEATURES OF A UNIT SECTOR FACILITY? The Unit Loan Facilities divide the loan into "first-out" and "last-out" instalments, thus generating loan tranches for seniors and juniors. Interest on the facilities is distributed among creditors on a disproportionate basis in order to offer the first-out instalment a lower interest effect than the last-out instalment.

Interest under the first-out and last-out agreements is payable to an administration agent in charge of the distribution of the part of the interest to the first-out and last-out lender on the basis of the assignment made. Obligatory and discretionary repayments are usually made in instalments to first-out and last-out creditors until certain "waterfall induced events" occur.

" Once these falls occur, the primary creditors shall be given a preferential right of repayment on both their interest and capital until each repayment is redistributed to the last-out creditors. 1 ) a defaulted debt under the loan agreement; 2 ) the borrower's non-compliance with all or certain key financials, generally within a percent limit; 3 ) bankruptcies and insolvencies; and 4 ) the borrower's non-compliance with all or a substantial part of its operations, generally after a specified recovery time.

Normally, the water case of settlement only exists for transactions and revenues that the agency receives from the securities, so that all other revenues that the agency receives are proportionately allocated to the creditors. Intermediary lender understandings for first and second lending institutions generally do not contain provisions relating to votes.

Within the framework of these agreements, the first-out and last-out creditors will stipulate that changes subject to the approval of "Required Lenders" within the framework of the loan contract will necessitate both "Required First-Out Lenders" and "Required Last-Out Lenders" irrespective of any other provisions in the loan contract. "The AAL may also impose transitional limitations on the number of votes, i.e. if, for example, a final creditor purchases part of the initial votes, the AAL may impose that the latter creditor has no votes in relation to its holding in the first part.

While an AAL usually contains similar terms to a first pledge / second intermediate lender pledge relating to the buy-out options, the AAL contains incremental triggering events and the buy-out options are usually reciprocal in nature (i.e. both the first-out and the last-out are given the ability to purchase the commitments of the other tranche).

1 ) the lender's omission in one instalment to authorize a change approved by the required creditors of the other instalment; 2) a loss of payments under the loan contract; 3) an expediting of the loan contract obligation or the agency has otherwise begun to exercise its guaranteed creditors' rights; 4) the opening of winding-up and/or liquidation procedures; and 5) the first creditors have informed the agency that a flood triggering incident has happened.

The buy-out pricing in most cases is substantially the same as that included in an intermediate lender contract for a first pledge or a second pledge - all pending commitments for each respective instalment. Buy-out rules require buying creditors to transfer advance payment bonuses to seller creditors if an advance payment bonus is made to buying creditors within a specified timeframe after the buy-out is exercised.

According to the approach, if a creditor of a given instalment wishes to transfer its credit to a third person, the creditor must make an offering to transfer the credit to the other creditors before he can make the transfer to the third person. One right of the first bid may stipulate that the transferor creditor submits the bid only to the other creditors of the respective instalment of the transferor creditor before he can transfer his loan to a third person.

However, other initial bid conditions may stipulate that the transferor creditor must make an offering of transfer to the creditors of its respective instalment and then, if the creditors of that instalment reject the bid, to the creditors of the other instalment before the transfer of its loan to a third person.

Creditors should in any case be fully cognizant of these rules, as they may affect the solvency of their credit and how quickly their credit can be granted. As with the first pledge arrangement, the idea of the moratorium has been incorporated into the LORs, albeit with some subtleties.

In the first place, there are usually two cycles, according to which group of creditors makes the claim on the broker to start exercising the guaranteed creditors' rights. If the required first-out creditors require the agency to begin exercising guaranteed creditors' rights, there is usually a wait of approximately 30 working days before the agency can do so.

The latter gives the latter creditors the opportunity to meet with the former to negotiate with the latter and to establish whether the latter wish to buy-out or not. If the required last-out creditors require the management agents to start exercising guaranteed creditors' rights, the more conventional standstill comes into force.

Here, the agency waits a timeframe, usually 90-180 days, before following the last lenders' application to enforce guaranteed creditors' interests. If, at the end of this term, the first-out creditors do not exert their claims against all or a substantial part of the securities, the agency will obey the last creditors' orders.

Traditionally, a first pledge agreement regulates the privileges of both the first pledgee and the second pledgee in the case of insolvency of a creditor. Those remedies usually comprise limitations on the capacity of the second-pledge creditors to oppose a disposal under section 363 of the Insolvency Code, limitations on the capacity of the second-pledge creditor to oppose a debtor-ownership credit provided by the first-pledge creditors, and other provisions regarding reasonable protections and interest after the Petition.

In the same way that some are questioning the enforcement of these rules in creditor contracts, we are expecting similar issues regarding their enforcement in AALs. We would also like to see case practice on the construction of lender contracts providing guidelines for the construction of AALs. While it is clear in the first pledge contexts that the first pledgees and the second pledgees are two different and separated categories of holders, it is still to be seen whether a receiver would recognise first-out and last-out providers of credit as separated categories of holders or not.

The reason for this is that in a traditionally first lien/secondary mortgage agreement, the obligor agrees to enter into individual and separated loan agreements with each group of obligors, whereas in a unitrank agreement, the obligor has only one credit agreement. Irrespective of the AAL' s stated remedies, this differentiation could result in a judge finding that first-out and last-out providers of credit are a singular category of providers.

The unit industry structure developed further in the past year and continues to do so. These differ significantly from the first and second pledge structure, and while the unit tranche arrangements provide time and convenience benefits to the borrower, the AAL negotiations require a targeted approach with first-out and second-out creditors.