Within the next stage of the credit cycle, we are about to see intercreditor agreements between banks/asset based lenders (ABLs) and unitranche lenders really tested for the first time.
Our latest edition of Capital Thinking informs debt professionals – bank lenders, debt funds, sponsors, shareholders, regulators and advisers – of the key considerations and practicalities when considering how intercreditor matters will play out.
The proliferation of borrowing over the past few months has been unprecedented, not just in terms of financial debt but also taxation and other creditor deferrals. Lenders are bracing themselves for increasing levels of distress and a rise in default rates. Where lenders and/or sponsors and shareholders are unwilling or unable to continue to support borrowers – or levels of debt are unsustainable – it is inevitable that there will be workout scenarios.
Where this current situation differs from the last downturn is the prevalence of bank and unitranche structures, which have developed in the private debt market since the financial crisis in 2008-9. Under an enforcement scenario or the threat of enforcement, intercreditor dynamics and the agreements that underpin them will be seriously tested, particularly in the context of the UK’s new Restructuring Plan and its European equivalents such as the new legislation proposed in Germany and the Netherlands. An appreciation of how the intercreditor agreement (ICA) works is necessary for navigating this next stage of the credit cycle.
This edition of Capital Thinking looks at:
- the development of the unitranche structure – from classic to bifurcated
- documenting the unitranche
- key issues in the unitranche ICA (ranking pre and post-enforcement, who controls enforcement, enforcement standstill and step-in rights, protecting value in distress, intercreditor release mechanism)
- ICAs in action – how will the various players respond in distress?
The private debt market will be exposed to issues it has not experienced before. Time will tell whether ICAs, heavily negotiated in buoyant credit markets, will stand up to the test.
If you would like to discuss this report further, get in touch with Christopher McLean.