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Liability Management Transactions: Drop-Down Financings and Uptiering Transactions, What is a Lender to Do?

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Thursday, September 19, 2024

Recorded event now available

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This CLE course will discuss liability management transactions currently being employed in the syndicated loan market, including "drop-down" and "uptiering" structures and how lenders might respond to these financing maneuvers. The panel will focus on liability management transaction issues highlighted in recent cases and elements of credit agreement covenants that a lender needs to consider in order to address these transactions.

Description

Liability management exercises have become more commonplace, and typically take the form of either drop-down financings or uptiering transactions, although other variations have emerged. Each type of these transactions involves complex structuring techniques that provide additional avenues of leverage for borrowers but can negatively affect the expectations and rights of existing lenders.

In a typical drop-down structure, the borrower forms and transfers assets to a subsidiary, allowing the subsidiary to incur new debt secured by the contributed assets. This alters the lien position of existing lenders who may have assumed they had a first priority claim to assets that have now been transferred to the subsidiary.

In the uptiering transaction structure, the borrower incurs new debt provided by a group of lenders, usually a subset of the existing lenders and sometimes the sponsor that owns the borrower. The existing debt of the participating lenders is exchanged for the new tranche of debt that “primes” the debt and/or liens of the other lenders. The result is that nonparticipating lenders are subordinated to the new tranche of debt.

Lead and participating lenders should carefully review loan documents to assess a borrower's ability to enter into subsequent liability management transactions. From the lenders' standpoint, the subordination of claims should be a "sacred right," requiring lender consent, as should the ability to amend not only specific pro-rata sharing provisions but amendments to allow transactions that would have the effect of impacting pro-rata sharing. With the evolution of the various alternative structures for liability management transactions, the drafting solutions to preserve lenders’ expectations as to the priority of their liens or debt have become even more complex.

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Outline

  1. Emergence of liability management in the current syndicated loan market
  2. Drop-down financing
  3. Uptiering transactions
  4. Subordination issues and intercreditor relationships
  5. Documentation considerations: limitations on investments, unrestricted subsidiaries, waterfall, pro rata provisions, and "sacred rights"

Benefits

The panel will review these and other key issues:

  • How does drop-down financing impact the collateral position of existing lenders?
  • Are there circumstances in which an uptiering transaction might be beneficial to nonparticipating lenders?
  • When is an intercreditor agreement needed in connection with a liability management transaction? What are the key terms?
  • What "sacred rights" provisions would limit the borrower's ability to engage in liability management transactions?

Faculty

Manzer, Alison
Dr. Alison R. Manzer

Partner
Cassels Brock & Blackwell

Dr. Manzer is a partner in the Banking & Specialty Finance Group and Business Law practice. She has developed...  |  Read More

Mason, Valerie
Valerie S. Mason

Member
Otterbourg

Ms. Mason is a member of the Banking and Finance department and Co-Chair of the Lender Finance practice group. ...  |  Read More

Morse, David
David W. Morse

Partner
Otterbourg

Mr. Morse is member of the firm and presently co-chair of the firm's finance practice group.  He represents...  |  Read More

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