Loan Market Association’s ‘super senior/senior ICA’ - a new standard?

This article was first published on Lexis®PSL Banking and Finance on 7 June 2018.

Paul Mullen is a partner in the Hogan Lovells London office. Acting for both lenders and borrowers at the top end of mid-market sponsor-backed financings, he has been particularly closely involved with the development of the direct lending market in Europe. In this interview with LexisPSL Banking and Finance, Paul predicts that the new form of leveraged intercreditor agreement (ICA) for a super senior revolving facility and senior term facility structure will prove a good starting point, not only for those deals adopting this type of structure, but also for the increasing number of first in/ last out deals seen in the market.

Original news

New form of ICA for leveraged acquisition finance transactions launched, LNB News 21/05/2018 78.  

The Loan Market Association (LMA) has launched a new recommended form of ICA for leveraged acquisition finance transactions that includes a super senior revolving facility structure.

Why has the LMA decided to publish a new form of leveraged ICA?

Mullen: Since the financial crisis, the European leveraged finance market has seen a steady rise in the number of private debt funds lending directly to private equity sponsors and others. The structure of choice for the funds is a ‘unitranche’ term loan which combines the traditional senior and mezzanine tranches into a single instrument with a blended margin.

However, it’s worth noting that the European form of unitranche differs from the approach taken in the US, where there would often be a separate ‘agreement among lenders’ whereby the participants in the term loan would agree priorities between them, are set out in a document which the borrower is not party to.

In Europe, all intercreditor provisions are typically set out in a single ICA which the borrower and all lenders are party to. The most common structure adopted in these types of deals is where one of more funds participate in the term loan on a pari passu basis, and a bank provides ‘super senior’ working capital facilities. The approach generally taken here is that all of the debt ranks pari passu as to payments but, upon enforcement, the working capital liabilities are elevated to the top of the waterfall to a ‘super senior’ position, and as such are repaid from recoveries ahead of the term loan debt. It is this structure that the new form of LMA leveraged ICA is designed to cater for.

Does the new document reflect the current market position for these kinds of transactions?

Mullen: The document provides a welcome framework for these types of transactions. To date, the market has generally used the framework of the senior/mezzanine LMA ICA for leveraged finance transactions, but each law firm has addressed the specific issues arising from the term loan/super senior working capital facility structure slightly differently.

The new form will help to achieve consistency in approach, but it is difficult to say that it reflects the current market position as it contains a significant amount of optionality and so does not prescribe any particular approach on the key negotiated points on these deals—and indeed, I am sure it was not the LMA’s intention to do so.

Do you envisage this document being heavily used?

Mullen: Yes, I think the document will certainly become the standard starting position for deals adopting this type of structure.

Any other points of interest worth mentioning here?

Mullen: The LMA has stated that it was not its aim to address a ‘first out/last out structure’ and that it has assumed, in producing this document, that all the lenders under the term facility rank pari passu at all times.

We are seeing many examples of first out/last out deals in the market, ie where it is agreed in the ICA that a portion of the term loan (often provided by the bank who is providing the working capital facility) ranks ‘super senior’ alongside the working capital facility. I expect that what we will see is that the new document will also be used as the starting point for those types of structures, with the necessary adjustments being made by the law firms advising on those deals.

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