Prepayment Structures in Leveraged Finance: Balancing Borrower Flexibility With Lender Protections

Description

A borrower and its creditors have competing concerns with regard to retirement of leveraged debt. The interplay between these goals shapes the prepayment requirements and protections in financing agreements. Counsel should know what is “market” for these provisions and how to balance these concerns in drafting syndicated, second lien and mezzanine loan agreements.

The borrower wants to avoid forced prepayment triggers that restrict its ability to transact business. Its lender may want such triggers to prevent a borrower from taking actions that could affect the value of its assets or the borrower’s ability to repay the loan. The borrower would like to be able to prepay the loan at any time, while the lenders may desire call protection.

Term loans commonly require a percentage of “excess cash flow” to be applied to prepayment. This allows the lender to share in the cash flow generated by the business’ performance in a good year, as a hedge against performance in a bad year. A borrower has a substantial incentive to try to shape the excess cash flow formula in a way that minimizes the amount calculated.

Listen as our authoritative panel analyzes various prepayment provisions, including prepayment triggers and debt retirement mechanisms like cash flow sweeps in leveraged finance transactions. The panel will discuss the specific concerns of syndicated, mezzanine and second lien lenders as well as those of the borrower in each type of transaction.