ALSO: CROSS-BORDER FEATURES
THE SECURED
MAY 2020 WWW.SFNET.COM
Putting Capital To Work
FEATURE STORY
The Pandemic and the Implications of Force Majeure Clauses THE PRESSURES BROUGHT ON BY THE COVID-19 PANDEMIC HAVE INCREASED THE LIKELIHOOD OF BORROWERS BREACHING THEIR FINANCIAL COVENANTS. SECURED LENDERS SHOULD BE AWARE THAT FORCE MAJEURE CLAUSES IN CONTRACTS MIGHT BE INVOKED BY COMPANIES
A publication of:
TOUCHING BASE FROM DISRUPTION TO TRANSFORMATION
SFNet Responds to Meet the Needs of the Industry
I hope this letter finds you safe and well as we continue to navigate and lead the way through this pandemic. I noted earlier this month how inspired I am by examples of how our community members are keeping essential supply chains intact, funding providers of critical services and responding to the surge of funding requests from businesses that have pivoted away from their usual products to manufacture PPE to ease the shortage, not to mention those who are donating and raising funds for groups being adversely affected during this unprecedented time. When members of the SFNet staff sat down last summer to plan out the 2020 TSL themes, May naturally became the International Issue as SFNet’s International Lending Conference was scheduled for this month. Then along came Covid-19, bringing a new meaning to “disruption.” We have kept the cross-border-themed articles as they remain relevant and the authors quickly updated their content to reflect current conditions, but, of course, this issue also features Covidrelated topics. Our cover story focuses on the threat of force majeure clauses, by frequent TSL contributor Myra Thomas, and members of the Dopkins team discuss the effects of the pandemic on field exams. On page 20 is a case study by Jones Day partners of a cross-border restructuring (syncreon) over many foreign and U.S. jurisdictions. Syncreon is widely considered to be the first case where an English scheme has been used to restructure the liabilities of a U.S.-based company. We all know the current health crisis has resulted in an economic crisis and many in our community are adapting to the widespread economic downturn. On page 33, Mark Kirsons of Sidley Austin provides a primer on the unique and interesting challenges of workouts. In Staying Secured in Uncertain Times: A refresher on taking security in Canada, page 30, attorneys from McMillan LLP discuss the differences between the personal property security regimes between the U.S. and Canada. As more and more companies look at integrating sustainability into their business processes and strategy, there is still much room for growth in the green and sustainable finance market. The Covid-19 crisis is only expected to increase interest in this area. Turn to page 27 for Green and
Sustainable Finance by Jaco Belder and Anne Geluk of NautaDutilh. I want to take this opportunity to update our readers on the various ways SFNet has responded to the current crisis. On the relief effort front, our Advocacy Committee has been working tirelessly, communicating with legislators and meeting directly with Treasury and Fed officials to advocate RICHARD D. GUMBRECHT for the interests of secured SFNet Chief Executive Officer lenders concerning the Paycheck Protection and Main Street Lending Programs. We’ve also begun delving into the HEROES Act, released by House Democrats this month as a marker for the next round of negotiations for COVID-related relief. There will be additional opportunities to press our interests with our champions on Capitol Hill in the coming weeks and months. And, for our international members, we have had success influencing, and are continuing to engage the UK government to bolster secured lender rights in the new Corporate Insolvency and Governance legislation. Since mid-March, nearly 5,000 participants have registered for SFNet’s fees-waived-for-members “Crucial Conversation Webinars”. These programs have focused on critical topics of relevance to our constituent groups from large banks to small factors, service providers and everyone in between. We are grateful to our panelists and sponsors for supporting this essential programming. Looking forward, we recognize our world has been changed by these circumstances and SFNet is adapting to these new realities. We will be introducing new technologies and resources while reimagining and transforming our events during this time of social distancing. We are excited to be announcing our 2020 40 Under 40 Awards recipients in mid-June. Although the June celebration has been delayed, the September issue of TSL will feature profiles of this year’s winners and we are planning for additional ways to celebrate these future leaders of the industry. The Women in Secured Finance Conference has been converted to a virtual conference (our first ever) July 29-20 as have our YoPro Summit and Cross Border Conference. Details will be announced shortly. Although we may not see each other in person for a bit, we remain a connected community and I thank you for doing your part in fulfilling our mission of putting capital to work.
1
THE SECURED LENDER MAY 2020
TABLE OF CONTENTS. MAY 2020 VOL. 76 ISSUE 4
COVER STORY THE PANDEMIC AND THE IMPLICATIONS OF FORCE MAJEURE CLAUSES P.16
The Pandemic and the Implications of Force Majeure Clauses The pressures brought on by the Covid-19 pandemic have increased the likelihood of borrowers breaching their financial covenants. Secured lenders should be aware that force majeure clauses in contracts might be invoked by companies. Here, industry executives provide their views on this concern. 16 BY MYRA THOMAS TSL INTERVEW
FEATURE STORY
A Factor’s Perspective on the Effects of Covid-19: Interview with Sue Duckett, Franklin Capital
Cross-Border Restructurings Case Study: syncreon
Franklin Capital’s Sue Duckett has seen a lot in her 25-plus-year career in the commercial finance industry. It has been overwhelming at times, with constant changes and an unprecedented number of new inquiries relating to personal protection equipment (PPE). 20 BY TINA SZWEJKOWSKI
Jones Day partners provide details on a cross-border restructuring case over many foreign and U.S. jurisdictions 22 BY BRETT BARRAGATE AND KAY MORLEY
Articles EXAMINER INSIGHTS
2
THE SECURED LENDER MAY 2020
FEATURED STORY CROSS-BORDER RESTRUCTURINGS CASE STUDY: SYNCREON P20
Post-Crisis Field Examinations Assessment of Damage and Alerts for Fraud Field examiners and commercial lenders have an opportunity to embrace new effective guidance while addressing key areas of concern in this new lending environment. 25 BY RUSSELL BARBER, DHEERAJ BALANI, KYLE HULSE
LENDING INSIGHTS
INVESTMENT INSIGHTS
Green and Sustainable Finance
Collaboration and Flexibility Key to Workouts
As more and more companies look at integrating sustainability into their business processes and strategy, there is still much room for growth in the green and sustainable finance market. The Covid-19 crisis is only expected to increase interest in this area 29
The article acts as a refresher for those who have not been involved in a workout in some time, and as a primer for those less familiar with restructurings. It considers certain issues or concerns present at the onset of a workout or restructuring, and suggests certain solutions or actions one may take during the workout process (understanding that a detailed review of actions taken in bankruptcy are beyond the scope of this article). The related benefit is this article also serves as a guide for addressing certain items when preparing financing documents to avoid future problems. 35
BY JACO BELDER AND ANNE GELUK INVESTMENT INSIGHTS
Staying Secured in Uncertain Times Attorneys from McMillan LLP discuss the differences between the personal property security regimes between the U.S. and Canada 32
BY JEFF ROGERS, TUSHARA WEERASOORIYA AND MARIA SAGAN
BY MARK KIRSONS
Departments TOUCHING BASE 1 INDUSTRY DEALS 6 NETWORK NOTES 14
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The Secured Finance Network is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations. The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services. The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender. The Secured Lender, magazine of the asset-based financial services industry (ISSN 0888-255X), is published 8 times per year (Jan/Feb, March, April, May, June, September, October and November) $65 per year non-member rate, and $105 for two years non-member rate, SFNet members are complimentary. Secured Finance Network 370 Seventh Avenue, New York, NY 10001. (212) 792 -9390 Email: tsl@sfnet.com
www.SFNet.com Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Secured Finance Network, 370 Seventh Avenue, New York, NY 10001 Editorial Staff Michele Ocejo Editor-in-Chief and SFNet Communications Director
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THE SECURED LENDER MAY 2020
SFNet Compendium of Secured Finance Law NETWORKING INDUSTRY KNOWLEDGE EDUCATION ADVOCACY
The Secured Finance Network Compendium of Secured Finance Law is a time-saving digital tool that enables you to research important legal issues related to secured transactions in any U.S. state within seconds.
In 2019/2020, 15 of the most active states were updated and additional states are being updated. Covered topics include: n n n n n n n
Lending Licenses Wage Liens Environmental Liens Processors’ and Repairmen’s Liens Corporate Guarantees Liens Against Personal Property Landlords’ Liens
n n n n n n
Usury Insolvency Laws UCC Prejudgment Remedies Bulk Sales Law Uniform Electronic Transmission Act
Member one-year Subscription: $395 Non-Member one-year Subscription: $595 Visit www.SFNet.com to subscribe.
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DEPARTMENT INDUSTRY DEALS
6
THE SECURED LENDER MAY 2020
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
N/A
N/A
$100 Million
Cannabis
Acreage Holdings, Inc., one of the largest vertically integrated, multi-state operators of cannabis licenses and assets in the U.S.
Credit facility
Allied Affiliated Funding, a division of Axiom Bank, N.A.
Bank
$1.5 Million
Trucking
Trucking company that hauls frac sand, along with cement, fly ash and other non-hazardous dry bulk commodities, Texas
Receivables financing
Amerisource Business Capital
Non-bank
$5 Million
Steel
Steel fabricator, Montana
Credit facility
Atalaya Capital Management
Non-bank
$100 Million
Lender finance
CURO Group Holdings Corp.
Senior secured revolving credit facility
Avidbank Specialty Finance
Bank
$9 Million
Healthcare
Falcon Critical Care Transport, El Sobrante, CA
Credit facilities
Bank of America, N.A., served as administrative agent for the new term loan credit agreement. Additionally, BofA Securities, Inc. and U.S. Bank National Association served as joint lead arrangers and joint bookrunners, U.S. Bank National Association served as syndication agent and Truist Bank served as documentation agent.
Bank
N/A
Restaurant
Darden Restaurants, Inc.
Term loan
Bank of America, JP Morgan and Truist
Bank
$120 Million
Retail: Beauty
Sally Beauty, Denton, TX
Credit facility increase, bringing total facility to $620 million
Bank of America, JP Morgan Chase and PNC Bank
Bank
$750 Million
Manufacturing
TopBuild Corp., the leading installer and distributor of insulation and building material products in the U.S.
New term loan and revolving credit facility
Bank of America Merrill Lynch, Wells Fargo Securities, LLC, BNP Paribas, Capital One, Citizens Bank, HSBC Bank USA, JP Morgan Chase Bank, N.A., TD Bank, N.A., and Truist Bank, as joint lead arrangers, joint book runners and co-syndication agents, Citibank, N.A as a joint lead arranger and documentation agent, CoBank, ACB and People's United Bank, National Association. Bank of America, N.A. is serving as administrative agent.
Bank
$500 Million
Oil & Gas
Suburban Propane Partners, L.P., a nationwide distributor of propane, fuel oil and related products and services, as well as a marketer of natural gas and electricity
Refinancing of revolving credit facility
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
BNP Paribas, Nordea Bank and Swedbank Bank
$90 Million
Solar
Scatec Solar
New and expanded credit facilities
BNP Paribas, Handelsbanken and Bank Nordea acted as coordinating mandated lead arrangers and bookrunners for the facility and Citi, Commerzbank AG, CrĂŠdit Agricole Corporate and Investment Bank, Danske Bank A/S, DBS Bank Ltd., London Branch, DNB Bank ASA, HSBC France, J.P. Morgan Securities plc, OP Corporate Bank plc, Santander, SEB and Swedbank AB acted as mandated lead arranger and bookrunners.
â‚Ź750 Million
Forestry
UPM, a creator of renewable and responsible solutions that replace fossil-based materials
Syndicated revolving credit facility
Briar Capital Real Estate Fund
Non-bank
$14 Million
Oil & Gas
Pipeline service provider to the midstream oil & gas industry, Houston, TX
Real estate term loan
Bridge Bank, a division of Western Alliance Bank
Bank
$12 Million
Technology
iCAD, Inc. (ICAD), a global medical technology leader providing innovative cancer detection and therapy solutions
Credit facility consisting of a $7 million term loan and a $5 million revolving line of credit
N/A
Non-bank
$325 Million
BDC
Capital Southwest Corporation, an internally managed business development company focused on providing flexible financing solutions
Increase of its senior secured credit facility from $295 million to $325 million
Centric Health Corporation
Non-bank
$30 Million
Healthcare
Capital Partners Inc., a capital partner to entrepreneurs and growth businesses
Term loan
Change Capital
Non-bank
$2 Million
Staffing
Auxiliary healthcare staffing platform
Asset-based revolving line of credit.
CIT Group Inc.
Bank
$325 Million
Telecommunications
Mobilitie Investments III LLC, a telecommunications infrastructure provider
Round of financing
7
THE SECURED LENDER MAY 2020
DEPARTMENT INDUSTRY DEALS
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
Credit Suisse AG
Bank
$100 Million
Tech-enabled lender
Credijusto, the leading techenabled lender in Mexico
Debt facility. The transaction follows the closing of a landmark $100 million credit facility with Goldman Sachs last year. These two transactions were the first such deals that both banks had completed with a Mexican fintech.
Crestmark - Asset-Based Lending Division
Bank
$500,000
Transportation
Specialized oversized-load transportation, Texas
Accounts receivable purchase facility
Crestmark - Asset-Based Lending Division
Bank
$250,000
Transportation
Dry van transportation company, Washington
Accounts receivable purchase facility
Crestmark - Asset-Based Lending Division
Bank
$1 Million
Staffing
Staffing company, California
Ledgered line of credit facility
Crestmark - Asset-Based Lending Division
Bank
$1 Million
Manufacturing
Metal products manufacturer, Indiana
Ledgered line of credit facility
Crestmark - Asset-Based Lending Division
Bank
$12.5 Million
Water management
Water management services provider, Texas
Ledgered line of credit facility
Crestmark - Asset-Based Lending Division
Bank
$2 Million
Banking
Prepaid card services provider, California
Line of credit facility
Crestmark - Asset-Based Lending Division
Bank
$150,000
Transportation
Trucking company, Ohio
Accounts receivable purchase facility
Crestmark - Asset-Based Lending Division
Bank
$3 Million
Oil & Gas
Oil & gas industrial services provider, Texas
Ledgered line of credit facility
Fifth Third Bank, National Association
Bank
$142 Million
Solar Power
Soltage LLC, a leading Senior constructionindependent power producer to-term credit facility. Fifth Third served as administrative agent and lead arranger for this financing with Silicon Valley Bank (SVB) as joint lead arranger on the investment.
Fifth Third Business Capital
Bank
$15.8 Million
Retail: Furniture
Comfort Research, LLC, the manufacturer of the Big Joe brand, which consists of casual furniture, pool products, and outdoor furniture, based in Grand Rapids, MI
Senior credit facility
Fifth Third Business Capital
Bank
$70 Million
Manufacturing
Lignetics, a market leader in turning wood waste into a range of premium eco-friendly 100% natural products across several consumer categories, based in Louisville, CO
Senior credit facility
8
THE SECURED LENDER MAY 2020
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
Fortress Credit Co LLC
Non-bank
$138 Million
Restaurant
CraftWorks Holdings, LLC, which operates restaurants and breweries under leading names such as Logan's Roadhouse, Old Chicago, Rock Bottom, and Gordon Biersch
Financing
N/A
N/A
$165 Million
Petcare
Freshpet, Inc. the leader in fresh, real food for pets
This new credit facility includes a $130 million delayed draw term loan facility and a $35 million revolving loan facility that replaces the company’s prior $55 million delayed draw term loan facility and $35 million revolving loan facility.
Gerber Finance Inc.
Non-bank
$2 Million
Solar Power
MPOWERD, which aims to create responsibly crafted, sustainable solar products
Line of credit
J D Factors
Non-bank
$300,000
Transportation
Transportation company, Nevada
Factoring facility
J D Factors
Non-bank
$120,000
Transportation
Transportation company, California
Factoring facility
J D Factors
Non-bank
$200,000
Transportation
Transportation company, New York
Factoring facility
J D Factors
Non-bank
$120,000
Transportation
Transportation company, Pennsylvania
Factoring facility
J D Factors
Non-bank
$2.5 Million
Transportation
Transportation company, California
Factoring facility
J D Factors
Non-bank
$700,000
Transportation
Transportation company, California
Factoring facility
J D Factors
Non-bank
$150,000
Transportation
Transportation company, Illinois
Factoring facility
J D Factors
Non-bank
$100,000
Marketing
Marketing company, California
Factoring facility
J D Factors
Non-bank
$500,000
Staffing
Construction staffing company, Texas
Factoring facility
JPMorgan Chase Bank, N.A., Toronto Branch
Bank
N/A
Manufacturing
RS Utility Structures Inc.
Factoring facility
J.P. Morgan Chase Bank, N.A.
Bank
$7.5 Million
Healthcare
The Joint Corp., a national operator, manager and franchisor of chiropractic clinics
Includes a $5.5 million development line of credit (LOC) and a $2.0 million revolving LOC, which has an uncommitted accordion feature for an additional $2.5 million.
9
THE SECURED LENDER MAY 2020
DEPARTMENT INDUSTRY DEALS
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
JPMorgan Chase Bank NA and Silicon Valley Bank
Bank
$150 Million
Food Production
Beyond Meat Inc.
Five-year secured revolving credit facility
JP Morgan, Bank of America, SunTrust Robinson Humphrey, BMO Capital Markets, MUFG Bank, Ltd. and Sumitomo Mitsui Banking Corporation
Bank
$3.6 Billion
Lender finance
Ares Capital Corporation
Revolving credit facility increase
Highbridge Capital Management, LLC
Non-bank
N/A
Healthcare
Senseonics Holdings, Inc., a medical technology company focused on the development and commercialization
Senior secured term loan agreement
N/A
N/A
$6 Billion
Manufacturing
Honeywell
Two-year delayed draw term loan agreement to maximize financial flexibility and further bolster liquidity in the event global economic conditions persist or worsen throughout 2020.
Huntington Business Credit
Non-bank
$65.2 Million
Steel
Liberty Steel Products, Inc., a family owned steel service, distribution and products company, based in North Jackson, OH
Credit facilities
Huntington Business Credit
Non-bank
$12 Million
Manufacturing
Custom Bilt Holdings, LLC, a manufacturer and distributor of metal roofing and rain gutter systems for residential and commercial applications primarily in the Northwest United States, located in Irving, TX
Credit facility
N/A
N/A
$1.1 Billion
Retail: Clothing
H&M
Revolving credit facility
KeyBank serves as administrative agent and lead arranger and Mizuho Bank, City National Bank, and First Financial Bank serve as participating lenders.
Bank
$95 Million
Retail real estate investment firm
Westwood Financial
Revolving credit facility
N/A
N/A
$1.5 Billion
Retail: Apparel and Home
Kohl's Corp.
Asset-based revolving credit facility
N/A
N/A
$544 Million
Retail: Electronics
French Retailer FNAC Darty
Government-guaranteed loan
K2 HealthVentures (K2HV)
Non-bank
$45 Million
Biotechnology
Inari, a biotechnology company
Debt financing
10
THE SECURED LENDER MAY 2020
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
N/A
N/A
$120 Million
Entertainment
Live Nation Entertainment, Inc.
Incremental revolving credit facility. Following this increase, Live Nation has approximately $940 million in available debt capacity, including $400 million in undrawn term loan A capacity and $540 million in available revolver capacity
MUFG Bank, Ltd.
Bank
$300 Million
Transportation
Ryder System, Inc., a leader in commercial fleet management, dedicated transportation, and supply chain solutions
Receivables-backed financing facility. MUFG Bank, Ltd. acted as facility agent for this transaction. MUFG Bank, Ltd. and Mizuho Bank, Ltd. are serving as participating lenders.
M&T Bank
Bank
$150 Million
Construction
ABLE Equipment Rental, Inc. of NY
Asset-based loan. The facility is comprised of a $100 million revolving line of credit as well as a $15 million term loan facility. Additionally, the transaction provides ABLE with a $35 million accordion feature.
Monroe Capital LLC
Non-bank
N/A
Manufacturing
To support the acquisition of Shaw Development, LLC, Bonita Springs, FL, by private equity sponsor Monomoy Capital Partners
Senior credit facility
North Mill Capital
Non-bank
$15 Million
Oral care
Provider of a wide range of oral and personal hygiene products and is currently meeting the demands for much needed hand sanitizing products, headquartered in California
Accounts receivable factoring facility
North Mill Capital
N/A
$1.25 Million
Printing
Yurchak Printing, which offers high quality, short-run digital book manufacturing services to the publishing industry, manufacturing and service companies, based in Landisville, PA
Asset-based revolving line of credit
11
THE SECURED LENDER MAY 2020
DEPARTMENT INDUSTRY DEALS
12
THE SECURED LENDER MAY 2020
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
N/A
N/A
$1.3 Billion
Retail
Office Depot, Inc.
Asset-based credit facility consists of a $1.2 billion revolving credit facility and a $100 million first-in, last-out (“FILO�) facility
Old Hill Partners
Non-bank
$16.8 Million
Healthcare finance
HealthGrowth Capital, LLC, Austin, TX
Financing consisting of both debt and equity. The debt portion of the financing consists of an initial $10 million credit facility.
Oxford Finance LLC
Non-bank
$104.3 Million
Staffing
Epic Healthcare Staffing, a portfolio company of Webster Equity Partners
Senior secured credit facility
People's United Bank, N.A.
Bank
$61 Million
Real Estate
Brightview Senior Living, a privately held real estate development and property management company specializing in multifamily and senior living communities.
Credit facility
N/A
N/A
$59 Million
Cannabis
Village Farms International, Inc. announced its majorityowned joint venture for largescale, low-cost, high-quality cannabis production, Pure Sunfarms
Expanded its credit facility with its existing lender to $59 million, including accordion provisions of $22.5 million. The expanded credit facility consists of a $7.5 million revolving operating loan and a $10 million term loan, in addition to its existing $19 million term loan.
Republic Business Credit
Non-bank
$4.75 Million
Communications and utilities
Communications and utility contractor
Republic provided a $3,650,000 ledgered line of credit with extended customer eligibility up to 120 days, a $750,000 unbilled receivables facility, along with a $350,000 equipment term loan secured by their equipment and real estate.
Lender/Participant (Role)
Lender Type
Amount
Industry
Borrower
Structure
Republic Business Credit
Non-bank
$2 Million
Manufacturing: Food
Natural food manufacturer, provides several branded plant-based food and beverages to large national organic grocery stores, along with several regional and independent grocers throughout California.
Asset-based loan without cashflow covenant requirements
N/A
N/A
$2.2 Billion
Hospitality and tourism
Royal Caribbean Cruises Ltd. Secured loan facility
Second Avenue Capital Partners
Non-bank
$17 Million
E-commerce
Crown & Caliber, an online marketplace leader in authenticated pre-owned luxury watches, based in Atlanta, GA
Senior secured credit facility
SG Credit Partners
Non-bank
$3 Million
Software
Founder-owned AI software subscription and services company providing a management platform for microservice-based enterprise applications
ARR borrowing base growth capital facility
Sterling National Bank's Asset Based Lending Group
Bank
$9 Million
Lumber
NorCal Lumber Company, Inc., Marysville, CA
Senior secured credit facilities
Sumitomo Mitsui Banking Corporation; Banco Bilbao Vizcaya Argentaria, S.A., New York Branch; BNP Paribas and Credit Agricole Corporate and Investment Bank and Sumitomo Mitsui Banking Corporation, as administrative agent.
Bank
$750 Million
Pulp and paper company
International Paper Company (IP)
364-day revolving credit agreement
Sunflower Bank, N.A.
Bank
N/A
Chemicals
Team Laboratory Chemical, LLC, Detroit Lakes, MN
Revolving and term debt commitments
The Toronto-Dominion Bank as lead arranger, Bank of America, National Bank of Canada, The Bank of Nova Scotia, and Canadian Imperial Bank of Commerce
Bank
$550 Million
Automotive
Boyd Group Services Inc., Winnipeg, Canada
Increased and extended its existing revolving credit facility. This credit facility was accompanied by the addition of a new sevenyear fixed-rate term loan A in the amount of $125 million, provided by TD Bank, N.A.
TradeCap Partners
Non-bank
$5.5 Million
A/V
Audio/visual-IT integration company, East coast-based
Purchase order facility
13
THE SECURED LENDER MAY 2020
DEPARTMENT DEPARTMENT NETWORK INDUSTRY NOTES MOVES IN MEMORIAM Joseph Pollicino passed away peacefully at home and surrounded by family on Friday, March 20, at the age of 80 after a nearly year-long battle with pancreatic cancer. Born on December 22, 1939 in New York’s Lower East Side, Joe also resided in Brooklyn and Bethpage before moving to Manhasset, where he lived the past 39 years while also spending time in Jupiter, FL and Westhampton Beach. Professionally, Joe had a distinguished 43-year career in finance, starting at Manufacturers Hanover Trust as a teller and rising eventually to become the vice chairman of CIT Group.
living legend, admired and loved by all. The ultimate family man, Joe is survived by his wife of 61 years, Margaret, younger brother Paul (Maria), three children, Joseph Jr. (Maureen), John (Diane), and Kerry (Tom), and seven grandchildren, Joseph III, Ryan, Brendan, Patrick, Lindsey, Owen, and Maggie. A devoted husband, father, grandfather, and friend, Joe will be sorely missed by all his family and friends. ABLC Celebrates Expansion with the Opening of Two New Northeast Offices
Joe made everybody feel special with the same enthusiastic greeting and was known for always being the person who loved to help others with any challenge. He has received numerous recognition awards from different charities for his various philanthropic work including hospitals, educational institutions, social services, and military support groups. He was a true
Asset Based Lending Consultants announces it has a stronger presence in the New York Tri-State Area with not just its new office in Connecticut, led by Patrick Chemngorem, CPA, but with the opening of its New York Metropolitan area office, headed up by Dustin Fitzpatrick, as of June 1, 2020. The presence of these two offices now gives it an opportunity to assist lenders within the Tri-State area in an ever-busy and ever-changing market.
Allied Affiliated Funding Appoints Kimberly Smotherman Chief Credit Officer, Factoring and ABL Allied Affiliated Funding is pleased to announce that Kimberly Smotherman joined the company in February 2020, serving as the division’s chief credit officer. Smotherman will be responsible for credit risk management and portfolio oversight. CIT Announces Community Support for those Affected by COVID-19 CIT outlined a $1 million community commitment to support those affected by COVID-19. These resources will provide some immediate relief to New York City and L.A. County, the respective headquarters for the company and its bank subsidiary. In addition, it will provide support for several community initiatives across the company’s footprint that aim to provide relief to those impacted by the pandemic, with approximately half of the funding supporting nonprofits assisting small businesses in California. Citizens Commercial Banking Hires Don Mastro as head of Asset-Based Lending Portfolio Management.
Let Utica Leaseco
Don Mastro, who will be based in Chicago, most recently managed a team of professionals overseeing $6 billion of assets as the central region ABL Portfolio Management leader at Bank of America.
your clients for success.
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New Business Development SVP Mark Pickering Brings 25-Plus Years of Experience to Gibraltar’s Team Gibraltar welcomes Mark Pickering as the newest member of its expert business development team. He is an SVP based in Atlanta, covering the states of Georgia, Tennessee, Alabama, and Mississippi. Gordon Brothers Names Laurence Sax as Chief Operating Officer As COO, Laurence Sax will lead Gordon Brothers’ finance, accounting, treasury, financial planning, corporate development, and information technology functions. He brings over 30 years of operating, finance, and turnaround and restructuring experience to the firm.
Gordon Brothers Names Evren Ozargun as Managing Director of Corporate Development and Credit In his role, Evren Ozargun will serve as advisor to senior leadership, helping set and execute the firm’s strategic agenda, including identifying and supporting new initiatives, pursuing new alliances, and structuring complex transactions. Gordon Brothers Names Steven Holstein Head of Business Development Steven Holstein will be responsible for building, driving, and leading global business development, including research, sales, and marketing strategies. Greenberg Traurig Continues Growth in Boston; Adds Corporate Shareholder Greenberg Traurig, LLP has added Jason S. DelMonico to its Boston office as a shareholder in the firm’s Corporate Practice. DelMonico is a banking and financial services attorney with over 20 years of experience representing major financial institutions and other commercial lenders.
KeyBank Names Greg Jones as Chief Diversity, Equity, and Inclusion Officer In this role, Greg Jones will be accountable for leading the strategy and tactics to improve the acquisition, movement, development and retention of diverse talent and suppliers. MUFG Pledges $3 Million to Support Those Affected by COVID-19 Mitsubishi UFJ, Financial Group (MUFG) announced that given the global impact and disruption of COVID-19, the company is taking measures to support communities in which it serves across the United States, Latin America and Canada, as well as clients and colleagues. Santander US Announces Leadership Appointments Santander Holdings USA, Inc. announced that Brian R. Yoshida has been named chief legal officer, effective May 4, 2020, and Joe Abruzzo has been named head of Commercial Banking for Santander Bank, N.A.
John Todd (JT) Joins SG Credit Partners SG Credit Partners (SGCP) announced the hiring of John Todd (JT) as a managing director in Chicago, IL. Tech Capital, LLC Hires Randall Haney as its Vice President of Business Development Randall Haney will be responsible for business development. An industry veteran with extensive experience in both factoring and asset-based lending, Haney has been in the commercial finance industry for more than 35 years. Wingspire Capital Hires David Phillips as Managing Director in the Atlanta Office David Phillips will be responsible for business development activities in the Southeast and Texas. He brings over three decades of origination and business development experience in asset-based lending.
Hitachi Business Finance Welcomes Mark Simshauser to Business Development Team Mark Simshauser will concentrate his efforts on attracting new factoring and asset-based lending clients across the United States. He is based in the New York region and is responsible for connecting with business owners and trusted advisors and communicating the variety of flexible financing options offered by Hitachi Business Finance. Huntington Commercial Banking Director Rick Remiker Announces Plan to Retire After more than 38 years in financial services, Huntington Commercial Banking director Rick Remiker has announced his decision to retire in May 2020. Scott Kleinman, a 28-year Huntington veteran, will succeed Remiker as Commercial Banking director and will serve on the bank’s executive leadership team.
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FEATURE STORY
The Pandemic and the Implications of Force Majeure Clauses BY MYRA THOMAS
The pressures brought on by the Covid-19 pandemic have increased the likelihood of borrowers breaching their ďŹ nancial covenants. Secured lenders should be aware that force majeure clauses in contracts might be invoked by companies. Here, industry executives provide their views on this concern. 16
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Roundtable Participants
he global supply chain has experienced massive disruptions, courtesy of COVID-19. As the days and months of the pandemic have built and its impact is felt, logistics and freight companies, manufacturers, and retailers have all taken a significant financial hit. For secured lenders, whether they be bank, independent assetbased lenders, factors, or those in the private equity arena, many of their borrowers are likely to breach or have already breached their financial covenants. The toll on the borrowing base of these industries does raise significant issues for secured lenders. Given the business shocks caused by the pandemic, there is concern that force majeure clauses in contracts might be invoked by companies so they can gain concessions for delayed delivery of products or non-payment to commercial landlords. In fact, in March, CEVA Logistics and DHL Global Forwarding had both invoked “act of God” actions as they relate to their carriers and logistics servicing companies. As these companies look to force majeure clauses to avoid the financial impact of nonperformance or a delay in delivery, secured lenders are taking a closer look at what this might mean for them if one of their borrowers does the same.
JEFF GOLDRICH
ANDREW HOLMES
North Mill Capital
Demica
JASON MILLER
HAILEY BENTON-THOMAS
Otterbourg P.C.
TBS Factoring Service
The Impact on the Supply Chain For retailers, manufacturers and other companies sourcing goods and parts globally, the current environment is uncharted territory. “Combined with the increasing need for cash, lenders will be pushed to maximize borrowing capacity,” says Andrew Holmes, head of North America at Demica. Many clothing retailers were challenged before the crisis, but COVID-19 will accelerate the restructuring or liquidation of some of these players, especially as they struggle with plummeting sales and spring and summer inventory they will need to dump, he adds. As the quality of receivables deteriorate, a robust receivables financing structure remains essential in this environment. According to Jeff Goldrich, president and CEO at North Mill Capital, there are other complications for the supply chain. With global production concentrated in China, there is concern with quality and getting goods out of China in a timely fashion. “Fronting cash to cover the manufacturers has obvious risk, and we are seeing letters of credit being used for protection,” says Goldrich. “We have not seen that in some time, at least from our vantage point.” Prior to the crisis, most of North Mill Capital’s import clients were buying from Asian suppliers on open terms, but now, due to demand, upfront cash is required. The key, he says, is to make sure deadlines and benchmark dates outlined in purchase orders are being met. The COVID-19 crisis has also changed what is and how much is being shipped. “We have existing clients and prospects who are getting large orders for all sorts of medical equipment and supplies,” says Goldrich. “We are continuing to aggressively advance on accounts receivable and inventory
and taking steps to ensure that the products are what they are purported to be and destined for reputable customers.” But for many products, and not just PPEs, Chinese manufacturing companies are requiring either large deposits or payment in full in advance before shipment. “We have been working with purchase order finance partners in an effort to help with that,” he notes. Another issue is getting any type of goods out of Chinese customs, which is taking a long time, if at all. There are also complexities once inventory reaches the United States. This is not the market where high-risk appetites alone prevail, says Hailey Benton-Thomas, chief operating officer and general counsel for TBS Factoring Service. “Among industry peers that I’ve spoken with, there seems to be a consensus that there will be supply-chain issues for at least the next six months and that there is no magic bullet to protect our interests,” she says. “It’s these times that require a lender to reach into their tool belt and have options on various deal structures that best fit the situation. Those with a line-of-credit borrowing base are likely looking to convert a portion of their
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FEATURE STORY portfolio to cash to prepare for increased ineligibles,” she says. Lower performing accounts that had potential will be the casualties of the crisis for some and opportunities for others.
Understanding the Risk Not surprisingly, contractual obligations are sure to be a much bigger and even more significant focus of secured lenders now and moving forward. According to secured lending attorney Jason Miller, a partner in Otterbourg P.C.’s Banking and Finance Department, when the borrower is the one looking to excuse the performance of its obligations to its customers, secured lenders should be mindful of the termination provisions in key customer contracts. He adds, “If the borrower’s nonperformance constitutes a breach of the contract that leads to termination by the customer, the borrower’s financial situation may change drastically depending on the relative importance of each contract terminated.” The borrower’s customers may also withhold payment from prior shipments, which negatively affects borrowing availability.
then, of course, the specific jurisdiction standards,” she says. “These situations cannot be assessed quickly, so if many such arguments are made, it would be highly time consuming and disruptive.” Jurisdictions also vary drastically, so it’s important to also review venue and choice-of-law provisions. Force majeure is sometimes applied locally in response to disasters, such as hurricanes, but Holmes notes that we have yet to see an example where it can be applied on a global scale. While we are not currently seeing widespread invocation of force majeure, it is impacting some industries already. “Often the threat of invocation of force majeure is sufficient to achieve modification of price or terms,” he adds. “We are seeing this in the oil sector in North America. It hasn’t yet been litigated to my knowledge, but refineries are extracting accommodation from suppliers to reprice the offtake agreements— the threat of force majeure is sufficient to achieve the objective.” And, in many ways, the concession is certainly a much easier thing for the borrower, and lender, than a contractual dispute.
Secured lenders in logistics and freight, for example, typically have a high volume of clients and debtors, notes Benton-Thomas. “Each situation involving force majeure will be very fact-intensive. The volume that could arise, combined with the detailed nature of each situation, is worrisome.” Typically, the secured lender’s contract is not the one at issue, but rather a contract somewhere else in the pipeline.
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Secured lenders in logistics and freight, for example, typically have a high volume of clients and debtors, notes Benton-Thomas. “Each situation involving force majeure will be very fact-intensive. The volume that could arise, combined with the detailed nature of each situation, is worrisome.” Typically, the secured lender’s contract is not the one at issue, but rather a contract somewhere else in the pipeline. “In every situation we are looking at the language in the contract itself to see if force majeure is mentioned, and we then review the severity of the actual COVID-19 impact, along with the timing of the impact compared to the contracted performance, other facts supporting force majeure defenses, such as mitigation, and
But where there is significant case law and precedent for natural disasters, a force majeure claim based on a pandemic has yet to make its way through the courts. According to Miller, there are relatively few examples of where force majeure arising out of recent events has prevailed in the courts. He does add, “However, hurricanes have their own force majeure case law rules. Hurricanes are always considered force majeure, so long as the asserter did not contribute its own negligence.” For example, mooring a boat inside a hurricane’s projected path has been ruled negligence that prevents prevailing on a force majeure claim.
Loan Agreements in Play
A Look Ahead
Additionally, if the impact of the COVID-19 pandemic grows, borrowers are likely to look to their loan agreements for potential excuses of nonperformance on a loan, such as force majeure, only to find their loan agreements likely to be conspicuously silent on the issue. “Courts will usually reject a force majeure claim if the parties’ agreement does not contain a force majeure clause,” says Miller. Where this is the case, borrowers will turn to common law mechanisms for excuse of nonperformance, which would be a factintensive inquiry based on applicable state law.
Courts should reject force majeure arguments if they are not listed in the contract. However, there are other ways a party might seek to excuse its non-performance, says BentonThomas. “In many jurisdictions, there are common law doctrines that could have the same impact.” There’s the doctrine of impossibility, which is similar to force majeure, and some states, like California, lessen the standard to “impracticability”, which would excuse performance in the event of unreasonable expense.
Additionally, if the impact of the COVID-19 pandemic grows, borrowers are likely to look to their loan agreements for potential excuses of nonperformance on a loan, such as force majeure, only to find their loan agreements likely to be conspicuously silent on the issue. “Courts will usually reject a force majeure claim if the parties’ agreement does not contain a force majeure clause,” says Miller.
When the loan agreement does include such a provision, in many jurisdictions, courts will construe a force majeure clause narrowly as a matter of law. Albeit atypical, for any loan agreements that do contain a force majeure clause, if it does not mention a “pandemic”, “disease” or “measures of any governmental authority,” the secured lender should be able to rest easy, Miller notes. Secured lenders need to double check their form documents to make sure there is no force majeure provision that could adversely affect them. They should also consider preparing responses now to potential comments from borrowers about force majeure that could arise during the loan agreement negotiation process.
The good news is that the exposure of secured lenders to these sorts of claims are limited because nonperformance isn’t excusable if the event preventing performance was expected or was a foreseeable risk at the time of the contract’s execution. Now that secured lenders are several months into the pandemic, borrowers with newer contracts would not be able to avail themselves of the same defenses.
Myra Thomas is an awardwinning editor and journalist with 20 years’ experience covering the banking and finance sector.
Fortunately, secured lenders can take some comfort in what courts have noted before regarding their obligations in a force majeure action. “I have yet to come across a force majeure argument that had any chance of success in our portfolio, though we’ve had several obligors raise the defense,” says Benton-Thomas. While there are many exceptions, and jurisdictions vary, she notes there is little reason for secured lenders to worry.
MYRA THOMAS
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TSL INTERVIEW FACTOR INSIGHTS
A Factor’s Perspective on the Effects of Covid-19: Interview with Sue Duckett, Franklin Capital BY TINA SZWEJKOWSKI
Franklin Capital’s Sue Duckett has seen a lot in her 25-plus-year career in the commercial finance industry. Her career has spanned several positions and two countries, but she has never seen anything such as the current crisis. It has been overwhelming at times, with constant changes and an unprecedented number of new inquiries relating to personal protection equipment (PPE). She pushed aside the mounting emails in her new home office to reflect on what she has seen over these past several weeks and where she thinks this might be going.
How have things changed for your business during this pandemic?
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Wow! Where do I begin? We have seen numerous aspects of our business change during this pandemic, from purchase orders being canceled or delayed to expecting debt to age out, along with clients experiencing less revenue. Email communication has increased with debtors and clients as many of us are working from home. This creates inefficiencies. Credit is being pulled every second by insurance companies. The retail industry was already in a tough place. Now, however, without the cash to see clients through the closures, I expect to see many heading toward bankruptcy. Credit worthiness has always used historical trading to
make decisions, but this is no longer the case as historical numbers are worthless in this climate. Despite making smart credit decisions when you purchase an invoice, the debtor may now be a concern when they are in the affected industries. How do you assess credit when a business is not operational? I have no doubt that all factoring companies are experiencing this.
SUE DUCKETT
Franklin Capital The shutdown means some businesses have nowhere to sell their products or services or are not considered an essential business and have to shut down. We have a client who supplies food to the airlines. Since flights have been drastically reduced, so has their revenue. Thankfully, they are not concentrated in this one industry, but it still has an effect on their business. Despite this difficult time, we have industries that are doing extremely well. For example, food suppliers to local stores are seeing a boom, especially with baked goods. We thought toilet paper was tough to find; now you cannot find bread, flour, or yeast. Computer games have seen a large rise in demand. In addition, office supply sales have risen as more people work from home. Ecommerce has also seen a huge rise in online shopping services. How have you been dealing with debtors who want to push payment terms? Many retailers have closed or advised us that payments will now be held back until later dates or even indefinitely. The first one came through the day after the first stay-at-home order was announced, and many requests have followed since then. We have talked with our clients (some are critical suppliers) and have managed to get the customer to revert to the original terms. In some cases, it will be just a matter of waiting. The invoices have been funded, but the debtor is not able to pay. This is certainly not a time to take legal action. If necessary, we have credit insurance to fall back on. Have your credit limits changed? How? Why? Credit limits are being reduced or removed daily and are dependent on the industry, concentration, and dollar amount. The credit insurers are seeing an increased number of claims. In order to fund at a higher level now, they will want a higher
premium if they decide to cover at all. We are impacted by our customers’ relationships with their clients and what and who they supply. Some of our clients have very good relationships with their customers so they expedite payment. We have kept a very high level of communication with our clients. Any changes in credit or information received from their customers are immediately passed on to our clients to keep them involved and up to speed with action being taken. It is not easy to tell clients their credit is being reduced, but they understand that we are trying to protect them--not just ourselves.
What is the most troubling thing you are seeing through this pandemic? What keeps you up at night? In the beginning, it was the element of surprise. Once we had contacted all our clients, there was some comfort. But many small businesses are not going to make it through the crisis. Retail is being hit hard and not knowing when it will reopen is very troubling. What really keeps me up at night is trying to find new ways to fund our clients. I’m always looking for that manageable way to take a different form of collateral. Life and the economy will be different going forward and not knowing what that looks like is a concern.
Have you continued to fund clients who have debtors pushing payments and changing their terms?
Reflecting on what you have seen so far, how do you think things will look when this is all over?
Yes, where we can. We are treating each account differently. Where we are comfortable in our risk assessment that the customer is likely to continue trading after the shutdown, we are providing facilities. Thankfully, our clients are dealing with many stores that are still open, including food and hardware stores. But for those that are not, we are trying to assist where possible and look at flexible ways to fund their business.
Everyone is talking about what the new normal will look like. We are getting used to working from home, entertaining ourselves at home, and almost exclusively shopping online.
Debtors that we cannot contact have caused bigger problems, but payment plans and details on how and when the customer can pay have helped us to continue funding them. Without that, there is a greater chance we will not be able to. What issues are you seeing with PPE and medical equipment providers? It would seem that everyone now has orders for millions of dollars to supply PPE. I would say 99.5% of deals that we are seeing for PPE are not from PPE industry companies, but are from businesses that have worked with importing goods, no matter the industry. They are now looking to supply PPE to states, hospitals, and large businesses. It is crazy, but the usual payment terms with these customers have now changed dramatically. We are now seeing these customers pay large deposits up front, make payments into escrow accounts, make payments once the goods leave China, and accept up to 15-day credit terms. Chinese suppliers are requiring funds up front, usually with the order--not necessarily upon shipment. So there is no surprise that we are being inundated with PPE purchase order funding requests. Many businesses looking to supply PPE have set up new corporations, keeping these separate from their usual course of business. They have very little financial backing and yet request large sums of funding, a lack of experience in the PPE industry, if any at all, working with new suppliers with no experience of the product and no knowledge of their FDA certifications. USA and China customs are constantly seizing fake FDA-certified equipment, so this is a major concern.
E-commerce has been pushed to another level, and it is only going to increase. Suppliers have an unexpected surplus of inventory that will need to be sold off once this is all over because they have not been able to sell it while stores are closed. Unfortunately, many of them won’t make it through this. Where are these companies going to sell their inventory surplus if the mom and pop stores do not reopen? They are going to need to turn to the Internet if these shops are no longer in business. What is the biggest lesson you have learned so far from this? 1. Assume nothing! 2. Communicate with your clients and their customers at a very high level. Understand where their needs are and where you can help to make sure expectations are set. 3. There are some things you cannot prepare for. Tina Szwejkowski is a marketing consultant focusing on helping financial services companies grow. Before starting Szway Marketing, she was the Conferences and Marketing Director for the Commercial Finance Association, now the Secured Finance Network.
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FEATURE STORY
Cross-Border Restructurings Case Study: syncreon BY BRETT BARRAGATE AND KAY MORLEY
Jones Day partners provide details on a cross-border restructuring case over many foreign and U.S. jurisdictions. 22
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Typically, only creditors with an economic interest in the company will vote on the scheme (i.e., those creditors who are ‘in-the-money’). Any “out-of-the-money”’ creditors are usually disenfranchised and will not have an interest in the restructured business going forward.
he recent restructuring of the U.S.-based group syncreon, using an English scheme of arrangement, highlights how the English scheme remains an ever-popular restructuring tool in cross-border restructurings. Syncreon is widely BRETT BARRAGATE considered to be the first case Partner where an English scheme has Jones Day been used to restructure the liabilities of a U.S.-based company. It was also the first time that an English scheme has been recognized in Canada. Given the innovate means by which the jurisdiction of the English court can be established, it is anticipated that more U.S.based entities could seek to restructure their balance sheets using an English scheme. In this article we set out what you need to know about the English scheme and discuss its application in KAY MORLEY the syncreon restructuring.
Partner
Like a U.S. Chapter 11 Jones Day proceeding, an English scheme is a debtor-in-possession proceeding whereby the company proposes the scheme and retains full control of the company during this process. The terms of the scheme are not prescribed and, therefore, the company has complete flexibility with regard to the terms of the scheme. A scheme can be used for a variety of purposes ranging from an amend and extend to implementing a debt-for-equity swap. For the purposes of voting, creditors are divided into classes by reference to there being a sufficient commonality of interest between creditors in the same class. As a starting point, secured and unsecured creditors will vote in a separate class. A scheme is approved if a majority of creditors, representing 75% in value of each class, vote in favor of the scheme. In addition, once the scheme has been approved by the creditors of the company, the scheme must be sanctioned by the court. The company selects which creditors it intends to scheme.
In order to restructure in the UK, broadly speaking, a company must either (i) be incorporated in the UK, (ii) have its centre of main interest (COMI) in the UK; or (iii) have a “sufficient connection” to the UK. In practice, this has meant that those international entities who wish to restructure in the UK without a pre-existing nexus to the UK will either undertake a “COMI shift” to the UK, insert a UK company into the existing group structure – this entity then accedes as a principal borrower to the relevant finance documents and becomes the scheme company; and/or a company can procure a change in the governing law of its finance documents to English law for the purposes of establishing a “sufficient connection” to the UK. The innovative means by which jurisdiction can be established in the UK for the purposes of proposing an English scheme to implement a balance sheet restructuring means that companies from across the world are regularly restructuring in the UK even though, prior to the commencement of the restructuring, the company had little or no connection to the UK. In the case of syncreon, Jones Day represented a group of secured term loan and revolver lenders (the “Ad Hoc Group”) in the global restructuring of syncreon Group B.V. (together with its subsidiaries, “syncreon”)—a leading provider of logistics services with over 14,000 employees across 100+ facilities located in 20 countries around the world. In the beginning of 2019, prior to the commencement of restructuring negotiations, syncreon had approximately $985 million in funded debt, in the following capital structure: n ~$680 million in secured term / revolving loan debt (the “Secured Loans”) n ~$80 million in secured ABL debt (the “ABL Debt”) n ~$225 million in unsecured notes (the “Notes”). In early 2019, the Ad Hoc Group formed to assess syncreon’s financial position amid mounting liquidity pressure. Shortly after organizing, the Ad Hoc Group agreed to provide syncreon with a short-term injection of liquidity, and thereafter began negotiating a comprehensive balance sheet restructuring with syncreon and other key stakeholders. After months of hard-fought negotiation, the parties agreed upon the following economic deal: 1. Secured loan lenders would receive:
a. 85.5% of the reorganized equity (assuming timely joinder to the Restructuring Support Agreement (“RSA”));
b. $225 million in new second-out term loans; and
c. the opportunity to participate in a portion of a $125.5 million new-money, secured, first-out term loan (“FOTL”).
2. Noteholders would receive:
a. 7% of the reorganized equity (assuming timely RSA joinder); and
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THE SECURED LENDER MAY 2020
FEATURE STORY b. warrants to acquire 10% of the reorganized equity. 1
3. syncreon’s other funded debt (including the $80 million ABL debt) would be consensually refinanced.
With regard to the implementation of the restructuring, syncreon was a U.S.-based entity with obligors across the world. The borrower of the Secured Loans and issuer of the Notes was a Dutch B.V and the relevant finance documents to be restructured were, at the time, governed by New York law. There were, therefore, a number of potential jurisdictions to consider from a restructuring perspective including a U.S. Chapter 11 proceeding and an English scheme of arrangement. Although both processes are similar in that both can be used to implement a balance sheet restructuring, they are not identical. In this case, the parties ultimately determined that an English scheme was the best approach. One of the most important considerations in that analysis was the fact that a judgment of the English court approving an English scheme has the benefit of automatic recognition across Europe2. In contrast to a scheme, a U.S. Chapter 11 proceeding would not benefit from any such automatic recognition and, where necessary, recognition of a U.S. Chapter 11 proceeding would need to be sought on a jurisdictionby-jurisdiction basis thereby potentially adding significant costs and, execution risk to the transaction. Recognition in Europe was important given that certain entities that both guaranteed syncreon’s funded debt, and generated significant revenue, were organized in various E.U. countries. An additional restructuring consideration was syncreon’s need to obtain a release of the guarantors on the Secured Loans and Notes in order to give full effect to the schemes. Unlike Chapter 11 (where, absent special circumstances, a party benefitting from a release must be a debtor), an English scheme can be used to release guarantees even if the guarantor is not a party to the scheme. Further, given that an English scheme is not technically an insolvency proceeding (and is available to both solvent and insolvent companies alike), the utilization of the scheme would potentially mitigate some of the negative effects of formal insolvency proceedings (e.g., negative press; the possibility of attempted termination of customer and supplier contracts). Once it had been determined that the English scheme was the most suitable restructuring tool, jurisdiction in the UK was established by amending the Secured Loan and Notes documentation to change the governing law from New York law to English law.
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THE SECURED LENDER MAY 2020
the international restructuring landscape. Lenders need to carefully consider the restructuring options available to them whilst at the same time anticipating in advance where the company might seek to restructure its liabilities, potentially to the detriment of certain stakeholders. Accordingly, whilst the advent of forum shopping has created many new opportunities to maximize recoveries for the benefit of stakeholders, abusive forum shopping is not uncommon and in all situations, lenders need to ensure that they are adequately protected in order to maximize recoveries and minimize the opportunity for downside risk in these situations. Please feel free to contact Brett Barragate at 1.212.326.3446 or bpbarragate@jonesday.com or Kay Morley at kmorley@ jonesday.com if you would like to discuss further any crossborder restructuring, bankruptcy or lending issues noted above. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect the views or opinions of the law firm with which the authors are associated. Brett Barragate is a partner at Jones Day’s New York office and is the Chair of the Americas region of its Financial Markets Practice. Kay Morley is a Business Restructuring & Reorganization Partner in Jones Day’s London office. Brett and Kay have represented financial institutions, direct lenders, private equity firms, hedge funds, issuers and mezzanine providers as principal outside counsel in all aspects of transactional and commercial financing-related matters. Their domestic and cross-border experience includes the negotiation and issuance of senior and subordinated debt facilities, as well as restructuring and bankruptcy matters. Jones Day is a global law firm with more than 2,500 lawyers in 43 offices across five continents. The Firm’s lawyers lead cross-border financing and restructuring deals in many of its foreign, as well as US offices, including cross-border deals in Europe, Latin America, Australia and Asia.
Ultimately, syncreon’s restructuring was supported by approximately 99% of the Secured Loan lenders and Noteholders. The schemes were sanctioned by the English court in early September 2019 and were recognized in the U.S. and Canada shortly thereafter. Recognition in the U.S. and Canada ensured that the terms of the scheme were recognized in both jurisdictions and would be enforced against any dissenting creditors located in either the U.S. or Canada. Given where we are in the credit cycle, it is anticipated that an increasing number of companies will need to implement a balance sheet restructuring on a cross-border basis. In these situations, a holistic approach is required to determine the right jurisdiction(s) in which to restructure with experienced advisers who truly understand 1 In addition, separate portions of the reorganized equity were set aside for parties that either (a) made concessions and/or amendments in connection with certain of syncreon’s existing indebtedness and/or (b) provided a backstop with respect to the FOTL. 2 On the assumption that Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) applies to the English scheme.
FIELD EXAMINATION >> GREEN & SUSTAINABLE FINANCE >>
FIELD EXAMS
EXAMINER INSIGHTS
Post-Crisis Field Examinations Assessment of Damage and Alerts for Fraud BY RUSSELL BARBER, DHEERAJ BALANI, KYLE HULSE
Significant disruptions in credit quality have facilitated the need for field examiners to be on alert for situations that are generally not prevalent in a more stable environment. A borrower and their employees’ lives and livelihood have suffered material impact during the COVID-19 crisis between those forced into unemployment or for those forced to significantly alter the way in which they fulfill their job duties. Business owners that might never have been considered a credit risk now face the prospect of having to consume current profits to pay off mounting obligations that accrued when their revenue stream dropped to zero. The retail recovery from this crisis will likely be slow as consumer attitudes will have been significantly altered. That slow recovery will impact commercial businesses and service companies that serve those outlets as well as energy and infrastructure companies through lower demand. Field examiners and the commercial lenders have an opportunity to embrace new effective guidance while addressing key areas of concern in this new lending environment.
An Assessment of “Collateral” Damage Sustained by the Lender For a field examiner in the post-crisis environment, the need to assess the lender’s current collateral position is vital. The field examiner should also pay close attention to the level of current activity at a borrower’s location and relay any concerns to the lender. While analysts will be keenly focused on financial performance and covenant compliance, it is the field examiner’s responsibility to offer a sound evaluation of the quality and performance of what could likely be the lender’s primary means of repayment in a liquidation. This is true even for credits that were previously deemed “cash flow” borrowers. With regards to accounts receivable (A/R), extensive testing and analysis should be performed to ascertain the quality of the asset and accuracy of the reporting document. There is likely to have been deterioration due to trade accounts slowing down payment. There is also a risk of extensive credit activity as purchases are returned and customer allowances are pushed forward. Are invoices well supported? Are cash receipts being posted timely and correctly? In a time of financial stress, even good people make bad decisions and
>> INTERNATIONAL FINANCE >> WORKOUTS & BANKRUPTCY >>
the easiest method to clean up ineligibles in a formuladriven line of credit is via misapplication of cash receipts. A close review of past due accounts with a focus on the critical column is essential. The field examiner should identify accounts that are newly past due, or larger accounts that might be encroaching on cross aging parameters. Potential write-offs should be determined not only for the negative earnings impact but also for the dilutive impact in a liquidation. An analysis to identify concentrations of exposure to industries related to travel, hospitality, those tied directly to the shutdown or of businesses deemed “nonessential” is very important. The field examiner should analyze A/R turnover and dilution in comparison to prior periods pre-crisis. A marked deterioration would likely be accompanied with an increased borrowing need. Increased line utilization in conjunction with a deteriorating collateral matrix could be an early indication that the lender runs the risk of funding heavily into a future overadvance. Increases in dilution could also indicate that the current structure is no longer aligned with the borrower’s collateral performance. For loan facilities where the lender has dominion of funds, a complete review of all non-lender inflows is key to ascertain if a borrower is depositing funds out of trust. If A/R remittances are being directly received, they should be forwarded to the lender in a timely manner. They should also not represent a significant percentage of total proceeds or the lender should be notified.
DHEERAJ BALANI Dopkins ABL Consulting Services
RUSSELL BARBER Dopkins ABL Consulting Services
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THE SECURED LENDER MAY 2020
KYLE HULSE Dopkins ABL Consulting Services
Takeaways 1
Assess Your Collateral Damage: We are only seeing the beginning of credit disruption. Collateral trends will be exacerbated to the negative and the propensity for a borrower to misreport collateral will be significantly higher.
2
Act Now – Conduct Remote Field Examinations: Remote field examinations are likely to be the norm for the near term as variances in state policies will dictate the ability to be onsite.
3
Perform Triage and Bring Borrowers Back to Health: Working closely with the borrower and increasing reporting requirements will enable lenders to make more informed credit decisions to bring a borrower back up to speed.
4
Schedule Your Next Collateral Field Examination: Field examination managers must now account deeply for the time it takes to conduct the examination based on many factors including the customer’s ability to soft-copy accounting records and to securely and timely present them to an examiner for offsite and remote review and analysis. Field exam managers must balance the logistics related to physical inventory testing requirement and available field examiner resources including their internal examiners and outsourced firms, with the capacity to handle both desktop review and interstate travel.
5
Expand Your Post-Pandemic Skill Set: Determine whether the necessary resources are available. The increased covenant breaches, collateral and financial deterioration will need to be captured and acted upon immediately. The need to educate the borrower on what data to archive is high.
Should a facility be purchased based and not a loan, out-of-trust deposits can be highly damaging as the financer’s only recourse would fall to the customer unless an account debtor was previously notified as to the nature of the transaction. The propensity for a company to overutilize inventory availability now is high even if their deal was not previously inventory-intensive, as the A/R base deteriorates. In the absence of a field examination, fraud risk significantly intensifies as inventory is the one borrowing component that can’t easily be reconciled utilizing third-party documentation. Financial stress can be easily buried in inventory. It could be that the company recently purchased a large amount of inventory in advance of a project that failed to materialize or was cancelled. This is a distinct probability for items that are longer lead time and is also a concern given the abrupt nature of the recent business interruption.
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These questions should be on every field examiner’s list with regards to inventory. Is the company managing inventory levels to match post-crisis sales trends? Are payments timely to critical vendors? Has there been a marked increase in inventory turnover? Is slow moving inventory increasing since the crisis and how is the company managing this? If turnover is increasing, is it due to a recent buildup or simply a falloff of sales activity. For a manufacturer, an analysis of the accuracy of work-in-process is essential to determine if inventory listed as raw materials is in an interim stage of fabrication. The field examiner should also determine if liquidation value has deteriorated with reductions to input costs that will almost certainly exist as suppliers offer incentives to bolster their own businesses. Supply chains will inevitably be affected by the crisis. Is the ability to get goods or required components adversely impacting production and thus sales.
To conclude, the need for a field examiner to understand the increased risks in a deteriorating credit environment is essential. Vital is an awareness for the increased potential of fraud or reporting manipulation to facilitate a borrower’s short-term liquidity needs. As previously stated, in periods of financial stress, even good people make bad decisions.
Formal Operating Procedures for “Virtual” Field Examinations In an environment where continued travel restrictions or social distancing are the norm, what is the lender’s tolerance for a full desktop review? This largely has to do with internal credit policy or a decision maker’s attitude towards remote examinations. In situations where remote examinations are permitted, the field examiner and the lending contact need to be educated as to the potential shortcomings of the process. In this field examiner’s mind, the most significant shortcoming is the inability to utilize the office environment for clues as to what might really be occurring with the credit. Simply listening to banter between employees is an excellent source of information as well as an observation of activity at the company. Is it neat and well maintained? Is a professional demeanor exhibited? Are employees disgruntled? While the mechanics of a remote field examination are essentially the same, a “how to” guide for the examiners should be authored. Lenders are going to expect the same product to a large extent even if the field examination is remote. Increased communication and greater understanding on how the field examination is being re-engineered and the limitations will be a critical element to the successful outcome and report delivery. Inventory transactions present a significant hurdle to a remote field examination. While cost testing, perpetual breakdowns, location breakdowns and gross margin analysis are relatively simple in a remote environment, performing test counts and analysis on the overall operations and facility conditions are limited. If the field examiner chooses to do test counting via some manner of video platform, attention should be paid to the randomness and spontaneity of the process which should be dictated by the field examiner. The field examiner should also include standard test counting checks and balances such as having company participants open random boxes for view. Fluid and constant communication with the borrower is key to facilitate timeliness. The field examiner’s ability to re-think their process to align with how documentation is being provided is also essential. Learning to work with what is being given to you when you get it and not sticking to your standard order of procedures is important. The field examiner should also be mindful that consistent communication with the lender can allay concerns about the remote nature of the field examination.
Performing Triage on the Dying and Dead As the coronavirus continues to impact businesses all around, it is important for lenders to consider which borrowers will be able to survive the downfall and which ones are probably not going to make it.
TSL INTERVIEW The lender must assess the borrower’s cash flow and determine to what extent there is ability to pivot to new markets. Key considerations: Is the borrower selling to a few select customers in an industry that may take longer to recover such as transportation, retail and hospitality? Is the borrower able to diversify their customer base so they can look for more profitable opportunities? Communication and ongoing monitoring will be key. The lender should consider having more frequent portfolio meetings with their underwriting team to determine where they stand and what action plans to take in order to prevent any major losses.
The Field Examination Scheduling Paradigm
For lenders that want to trim their portfolio, they may want to consider having discussions with other nontraditional lenders or finance companies and factoring organizations that are willing to take on more risk. Many of these lenders rely less on cash flow and more on collateral as a form of repayment. The legal team should review loan documentation with respect to collateral access rights, guarantors, signers etc. so the lender can be well prepared for a liquidation-type scenario.
Adhering to a strict criterion by the lender’s field examination scheduler, that the lender must have a field examiner on site just hasn’t been possible in the early stages of the CVD-19 restriction period. These lenders in particular are challenged with considering engaging a firm to conduct desktop-type examinations whereas prior, a field examiner was physically on-site throughout the field work. Technologyadvances have made borrowers able to live up to much of the standards, though the scheduling paradigm has to balance time it takes to perform each field examination within the portfolio, as well as the nuances with each credit. Examiners that are not physically on-site are primarily considered “out of sight, out of mind” and therefore second on the company contact’s list of priorities. The field examination information flow or drag often plays into the time to completion and this will extend the field examination time regardless of the client’s ability to convert all documentation to soft copy and comply with the remote field examination. In addition to this delicate balance, the deferred inventory test counts not waived and the scheduling of them will be challenging and therefore must consider the extent to which each jurisdiction, and office within each jurisdiction, is open for business and available to accommodate a field examiner’s physical presence.
Prop Up Borrowers and Bring Them Back to Health
Field examinations are generally considered just that; Field Examinations. Examiners have always been considered the eyes and ears of the lender. The new field examination scheduling paradigm in the short run will be somewhat chaotic for managers primarily due to travel restrictions as the “reopening hurdles” defined by the CDC to phase into re-opening vary by state and region across the nation. Borrowers and physical examiners located across state lines or in and around hot spots will face a number of challenges.
Adhering to a strict criterion by the lender’s field examination scheduler, that the lender must have a field examiner on site just hasn’t been possible in the early stages of the CVD-19 restriction period. These lenders in particular are challenged with considering engaging a firm to conduct desktop-type examinations whereas prior, a field examiner was physically on site throughout the field work.
Bring a borrower back to normalcy will be a challenging task. Due to the greater risk of debtor insolvency, lenders are not afforded the luxury of cherry picking the traditionally safer blue-chip receivables for funding. In such circumstances, the lender may consider applying pre-emptive reserves to specific customers, industries or geographic locations or designating debts owed by those riskier debtors simply as ineligible for funding. Increasing reporting requirements is key. Borrowers that are expected to recover should provide a forecast and financial plan to determine the probability that they can turn around their business and improve their cash flow situation. If a borrower is in default, the lender may want to require borrowers to reduce or eliminate shareholder distributions and/or salaries for higher paying executives to generate additional cash flow. Lenders should also review any federal government aid that was provided and determine how sufficient this will be in the short run and how much borrowings will be needed as a result.
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FIELD EXAMS
Post-Pandemic and the Field Examiner’s “new” Skillset Lenders may consider committing to an internal team comprised of A/R verification specialists and collateral analysts. These will be crucial roles due to the closer monitoring that may be required due to collateral and financial deterioration. Constant review of ineligible calculations and a new pivoted focus on trends for accuracy is key here since borrower cash flow will seemingly have tightened. This should also include a bank statement review as the propensity for borrowers to be out of trust is high in this environment especially for dominion of funds (DOF) borrowers. Advanced review of the BBC submission in terms of cash reporting could be worthwhile rather than just month end cut offs. A borrower can potentially divert a month of collections before the lender knows what is happening. The post-pandemic world of asset-based lending may not so much require new skill sets but the re-allocation of existing resources to catch the trending on the front end. The lender is no longer in a position to just wait for the field examination to expose results. Lenders now will cope with a high volume of covenant breaches, forbearance, requests, line limit increases and over advances. Resources additives, so to speak, will need to catch the collateral and financial deteriorations on the front end and act rapidly to address any issues. The addition of more or astute operational staff to handle these issues and rapidly respond will be imperative.
Post-COVID-19 – Will there be Meaningful Comparisons of Data The field examiner should include an evaluation of the borrower’s technological abilities in this process and encourage the necessity of maintaining historical documentation, as many systems do not facilitate the re-creation of such for key lookback components. This should include a client’s ability to soft-copy and archive account data, maintain support documentation for testing purposes and maintaining reference documents such as loan agreements, landlord waivers, guarantor information, etc.
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The valid comparisons to pre-crisis periods is more a timing issue than technological ability. Until such time as a standard review period has lapsed, which can be a year or more, comparing current and prior data is not meaningful as indicators will generally be negative by default. Even comparing periods up to two prior years may not be valid, depending on the speed of the recovery. Avoid the temptation to extrapolate or common-size one dataset to the other as you might be comparing apples to oranges depending on individual industry trends. Facts are facts when comparing financial data. The underlying cause of a deteriorated trend will be well known. A focus on management’s outlook as to where they can or will be and when is likely more valuable to a credit officer. Understanding that these parameters exist will allow the field examiner to offer more meaningful interpretation of what is being presented. Dheeraj Balani, CFE, performs field examinations for commercial lenders throughout North America. He brings
over 20 years of field examination and credit underwriting experience with large financial institutions. Dheeraj was formally credit trained at Comerica Bank. He maintains a strong reputation among national lenders for his ability to perform complex examinations for a variety of industries. Dheeraj is a Certified Fraud Examiner and member of the Association of Certified Fraud Examiners. He graduated with a Masters of accounting from Florida International University and maintains a BSBA from Boston University, with concentrations in finance and management information systems. Russell Barber performs field examinations and delivers comprehensive analysis of accounts receivable and inventory and the evaluation of the financial performance of various organizations as an integral part of the asset-based lending process. He began his career as an audit manager for Statesman Business Advisors, a premier investment banking and financial advisory firm serving middle-market clients. As vice president & director of audit for Marquette Commercial Finance, Inc. and related affiliate company KBK Financial, Inc., he managed an external staff of auditors overseeing securitized commercial asset-based lending and factoring portfolio aggregating $120 million. Kyle Hulse has over 20 year of field examination experience and leads the Firm’s focus in specialty finance. He has wide experience in conducting field examinations for rediscount facilities extended to factoring companies, insurance premium finance companies, “buy here pay here” auto finance and other consumer-based specialty finance facilities. In addition, Kyle has experience working on behalf of credit facilities involved in financing corporate relocation equity advance and mortgage buyout programs that facilitate the unique needs of the corporate relocation industry. Kyle is a member of the Association of Certified Fraud Examiners. He graduated with a Masters of Arts in economics from SUNY Buffalo and a Bachelor of Arts in legal studies and criminal justice from SUNY Buffalo. Dopkins ABL Consulting Services is in the business of helping its clients improve the profitability of their loan portfolio through effective risk evaluation, collateral monitoring, and reliable and accurate field examinations. For more than 30 years, it has assisted commercial lenders with research and risk evaluation of a credit decision, and with continued monitoring of loans once granted. Its underlying objective is to improve the profitability of clients’ loan portfolio while being a trusted advisor to their important prospective and existing client relationships.
FIELD EXAMINATION >> GREEN & SUSTAINABLE FINANCE >>
GREEN LOANS
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LENDING INSIGHTS
Green and Sustainable Finance
As more and more companies look at integrating sustainability into their business processes and strategy, there is still much room for growth in the green and sustainable finance market. The Covid-19 crisis is only expected to increase interest in this area.
BY JACO BELDER AND ANNE GELUK The worldwide market of green and sustainable finance is flourishing. As companies and lenders worldwide increasingly try to integrate sustainability into their business processes, the volume of sustainable debt issued globally has shown a spectacular growth over the last few years, with a total volume of $465 billion globally in 2019, according to BloombergNEF. 1 While it is, of course, hard to tell what the overall impact of the current Covid-19 crisis will be, it seems safe to presume that the green and sustainable finance market will continue to grow as companies will more than ever focus on tackling environmental, social and governance (ESG) challenges to safeguard their businesses. Whereas up until recently “green” and “sustainable” projects were funded primarily by means of green bonds – securities with proceeds that are used entirely for climate and environmental projects – the global market for green and sustainable finance has developed various innovative financing mechanisms, providing borrowers with flexible solutions to integrate environmental or sustainable targets into their business operations and funding. While green bonds still constitute more than half of the entire sustainable debt market in 2019, the relatively new product of sustainability-linked loans – loans linked to the borrower’s performance on defined environmental, social or governance (ESG) criteria – have quickly gained much popularity with a total volume of $122 billion in 2019, according to BloombergNEF. Up to now, there have been no real “market standard” forms of green or sustainable loans nor any “market standard” provisions that are typically used for such loans. As a point of reference, the Loan Market Association (LMA), in joint cooperation with the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association, has published the Green Loan Principles (GLP) and the Sustainability Linked Loan Principles (SLLP). 1
The GLP and the SLLP have been developed by experienced working parties, consisting of representatives from leading financial institutions active in the global syndicated loan market. The ultimate goal of each of the principles is to provide for a globally acceptable approach for granting green and sustainable loans to better facilitate and JACO BELDER NautaDutilh support environmentally and sustainable economic activity as well as to promote the development and preserve the integrity of the green loan and sustainability-linked loan products. The GLP and SLLP are both voluntary recommended guidelines, which – depending on the underlying characteristics of the transaction – are to be applied by market participants on a deal-bydeal basis. Since the launch of the GLP in 2018 and SLLP in ANNE GELUK 2019, market participants NautaDutilh have sought further explanation on the practical application of the GLP and the SLLP to their transactions. As a response, earlier this month, the global loan market associations published two new guidance documents in which some of the most frequently asked questions in relation to the GLP and SLLP have been addressed. In this article, we look a bit more in details at the core components of the GLP and the SLLP, and how these principles are applied in practice.
GLP principles The GLP provide for the following definition as to what a green loan is: “Any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing green projects”. In the appendix to the GLP a non-exhaustive list of categories of green projects is provided, including sustainable water and wastewater management,
https://about.bnef.com/blog/sustainable-debt-sees-record-issuance-at-465bn-in-2019-up-78-from-2018/
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GREEN LOANS
Use of Proceeds
The loan documentation should clearly indicate for which green projects (and expenditure relating thereto) the loan proceeds will be utilised.
Process and Project Evaluation
A borrower should inform its lenders of: i. its environmental sustainability objectives; ii. the process it put in place to establish how its projects fits within the framework of the GLP; and iii. other eligibility criteria applicable to its green projects. A borrower is encouraged to disclose any green standards or certifications they wish to comply with. Currently, there are several initiatives – at various stages of development – to produce definitions, standards and catalogues to determine whether a loan is green, as well as to provide mapping between them to ensure comparability.
Management of Proceeds
Reporting on Proceeds
Proceeds of a green loan should be channeled separately from any other proceeds utilised under the relevant loan in order to be able to identify the application of green loan proceeds. A borrower should provide its lenders on an annual basis with up-to-date information on the use of green loan proceeds, until fully drawn; and, if necessary, thereafter in the event of material developments.
clean transportation and green buildings. Furthermore, according to the GLP green loans must align with the following four components: (table above).
SLLP principles According to the SLLP, sustainability-linked loans are: “Any types of loan instrument and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivise the borrower’s achievement of ambitious, predetermined sustainability performance objectives.” Relationship to Borrower’s Overall Corporate Social Responsibility (CSR) Strategy
A borrower should inform its lenders about its sustainability objectives, in line with its CSR strategy, and explain how these align with the SPTs.
Target Setting – Measuring the Sustainability of the Borrower
SPTs applicable to the relevant transaction should be negotiated and agreed between lenders and borrowers. A sustainability coordinator or sustainability structuring agent may be elected by a borrower to assist with negotiating the SPTs. SPTs should be ambitious and meaningful to the borrower’s business.
Reporting
A borrower must be transparent towards its lenders and should provide them at least annually with updates in respect of its SPTs. Typically, such updates will be included in the borrower's annual report or CSR report. Where appropriate, a borrower may also choose to share such information privately with its lenders.
Review
Whether or not an external review of the SPTs will be required will need to be discussed between lenders and borrowers on a deal-by-deal basis. For listed borrowers, lenders may be satisfied with the borrower's public disclosures to verify the performance of the SPTs. However, if information relating to the SPTs is not publicly available, external review will in most cases be required. If internal reviews are allowed, a borrower should demonstrate that its internal expertise is sufficiently qualified and independent, to validate its performance against the SPTs.
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In the appendix to the SLLP, a non-exhaustive list of categories of sustainability performance targets (SPTs) is provided, including energy efficiency, affordable housing and biodiversity. Similar to green loans, sustainability-linked loans must align with four components: (table lower left column)
Sustainable loans in practice Although there are no real “market standard” forms of green or sustainable loans nor any “market standard” provisions that are typically used for these loans, in practice we commonly see the following provisions in standard loan documentation adjusted.
Purpose clause The purpose clause in loan documentation is of particular importance when it comes to green loans. As one of the core components for green loans, the loan documentation should clearly indicate for which green project(s) the loan proceeds will be utilised. Any breach of the purpose or use of proceeds provisions should be taken seriously and the loan should not be considered green from the date of occurrence of such event, subject to any cure rights. If the green loan takes the form of a revolving credit facility, the use of proceeds component may be less detailed compared to term loans, as long as the purposes of the revolving credit facility fall within the scope of the GLP. Tracing the proceeds of a revolving credit facility may be facilitated by structuring the facilities into separate tranches; for example, by splitting the revolving facility into tranches for general corporate purposes and for green purposes. Only the green tranches will be classified as green. The focus of sustainability-linked loans is on the performance of the borrower’s SPTs, rather than the use of proceeds. Contrary to green loans, sustainability-linked loans may be used for general corporate purposes.
Margin adjustments A green or sustainability-linked loan is in principle priced in the same way as any other loan. However, green or sustainability-linked loans characteristically try to incentivise borrowers to achieve ambitious, predetermined environmental sustainability objectives or SPTs. If targets are met then the margin will be reduced; if not, then the margin increases. Often grids with various margin criteria are being used, where the margin further declines if more targets are met (or vice versa if more targets are missed). The mechanism for the measurement of the borrower’s improvement against the predetermined environmental sustainability objectives or SPTs must be carefully considered and should be documented in the facility agreement.
Information undertakings/conditions precedent Reporting is a core component under the GLP and SLLP. Borrowers should provide their lenders annually with up-todate information on the use of green loan proceeds and the achieved impacts in respect of the agreed environmental sustainability objectives or SPTs. Such ongoing reporting will typically follow the usual reporting that borrowers would be expected to do under their information undertakings. Although the GLP and SLLP do not prohibit internal review and self-certification, lenders often require external review of (part of) a borrower’s green loan framework or SPTs to ensure alignment with the GLP or the SLLP. Several types of external review are being provided by consultants, institutions or other qualified parties. The required external review will become a condition precedent to the relevant loan being made available. An important goal for the development of the green and sustainable loan market is to build more confidence in external reviews and certifications. For this, appropriate standards will need to be developed that are consistently applied across transactions.
margin will be applicable. However, for lender-friendly loans, failure to comply with green or sustainable undertakings / representations may have further implications, such as a draw stop for new funds or triggering a default, pursuant to which lenders may use their usual acceleration rights.
Conclusion As more and more companies look at integrating sustainability into their business processes and strategy there is still much room for growth in the green and sustainable finance market. Without doubt the Covid-19 crisis will, next to short-term headwinds, generate strong tailwinds for sustainability efforts of companies. It seems evident that the loan market will continue to innovate in structuring the terms of financings to play its part in this development. We expect that a variety of green loans and sustainabilitylinked loans, as well as multiple ways in which the GLP and SLLP are applied in the relevant loan documentation will continue, as each sector, borrower or asset class has different characteristics, requiring tailor-made approaches.
Although the GLP and SLLP do not prohibit internal Undertakings/rep- review and self-certification, lenders often require external review of (part of) a borrower’s green loan resentations Green or sustainabilityframework or SPTs to ensure alignment with the linked loans contain GLP or the SLLP. Several types of external review are certain specific covenants or being provided by consultants, institutions or other representations including qualified parties. (i) an undertaking that the value of the relevant green assets (for example: windmills or waste disposal systems) will always be higher than the proceeds drawn under a green loan; (ii) an undertaking that the agreed environmental objectives or SPTs will be met; or (iii) an undertaking / representation that the proceeds of a green loan will be utilized for specific green projects. The consequences of not complying with any such undertaking / representation differs. For borrower-friendly loans, failing to comply with the relevant undertaking / representation only impacts the pricing, and a higher
Jaco Belder (partner) and Anne Geluk (associate) form part of NautaDutilh’s Dutch finance team and have both extensive experience in a wide range of domestic and international financing transactions. Jaco’s practice focuses on real estate finance, PPP/PFI projects, infrastructure as well as area development projects in which he represents both lenders and consortia, investors and development companies. Anne specialises in real estate finance, acquisition finance and project finance and represents banks, financial institutions as well as corporate clients.
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FIELD EXAMINATION >> GREEN & SUSTAINABLE FINANCE >>
INTERNATIONAL FINANCE
INVESTMENT INSIGHTS
Staying Secured in Uncertain Times
A refresher on taking security in Canada BY JEFF ROGERS, TUSHARA WEERASOORIYA AND MARIA SAGAN Attorneys from McMillan LLP discuss the differences between the personal property security regimes between the U.S. and Canada. The global COVID-19 pandemic continues to shake the North American marketplace. While we are months away from understanding the full impact of the pandemic, it is increasingly likely that businesses will be under severe distress as they face supply chain interruptions, workforce challenges, decreased consumer spending and travel restrictions. In this uncertain economic environment, lenders should be proactively assessing their exposure from loan portfolios and reviewing their collateral positions to ensure that they are in the best position to react quickly to borrower challenges. In particular, it is recommended that lenders review and confirm that any security taken to support their loans remains valid and effective. To that end, lenders that have borrowers in both the United States and Canada, should be aware of the differences between the personal property security regimes in these two countries. In the United States, Article 9 (“Article 9”) of the Uniform Commercial Code (“UCC”) governs secured transactions while the equivalent regime in the common law provinces of Canada is the Personal Property Security Act (Ontario) (“PPSA”) or equivalent legislation in each other common law province. In Quebec, the creation and enforcement of security on movable (personal) and immovable (real) property is governed by the Civil Code of Quebec. The PPSA and UCC regimes are largely similar as the PPSA is based on the UCC. Although the Civil Code of Quebec is based on a European-styled civil code model, it provides for substantially similar protections for secured lenders to those found under the PPSA. However, there are key differences lenders should be aware of when considering their security interests under all Canadian jurisdictions.
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This article will seek to highlight some of the key differences between the Canadian and UCC regimes that creditors should be aware of when obtaining, maintaining and enforcing security. While the main focus will be on differences between the PPSA and the UCC, special mention will be made of the Civil Code of Quebec to highlight key differences.
Security Interests Generally In order to have a valid security interest, there must be attachment
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and perfection. Attachment generally occurs when funds are advanced to a creditor pursuant to a financing agreement. This is the same under both regimes. In Canada, in order to perfect a security interest, you must “register” that interest in the PPSA registry. To do so, the secured creditor must file a financing statement. This financing statement contains information about the parties as well as the security agreement and general information about the collateral. Under the UCC, “filing” a financing statement can be used to perfect a security interest. This process is similar to registering an interest under the PPSA. However, as will be discussed below, security interests in some types of collateral can be perfected by “control”. The PPSA and Article 9 of the UCC apply only to personal property and are inapplicable to real property.
Taking Security in Quebec
JEFF ROGERS McMillan LLP
TUSHARA WEERASOORIYA McMillan LLP
In Quebec, the creation and enforcement of security rights is governed by the Civil Code of Quebec. The hypothec is a type of security interest that can be granted to secure an interest in personal property. It is generally required that a hypothec be published (similar to registration) in the Quebec Register of Personal and Movable Real Rights (“RPMRR”) in order to enforce the rights against third parties.
Priority Both the U.S. and Canadian regimes are similar in that
MARIA SAGAN McMillan LLP
a lender must have a perfected security interest in order to be able to claim that security interest. Where there are multiple security interests registered in respect of the same collateral, the secured lender with priority will be able to enforce on the collateral. Priority is generally given to the party that has registered their interest first. This principle is the same under the UCC, the PPSA and the Civil Code of Quebec. However, as will be discussed in detail below, a lender that has perfected by control will have priority over a previously filed security agreement. There are also certain forms of interests that will have priority even if not registered first. Under the PPSA, a Purchase Money Security Interest (PMSI) ranks ahead of all other security interests.1 A PMSI is created where a lender advances funds to purchase a specific asset, and therefore grants that lender “super-priority” in that specific asset. The concept of a PMSI is also found in the UCC which gives creditors priority over competing interests.2 However, no such concept is found in the Civil Code of Quebec.
Perfection by Control – Investment Securities and Bank Accounts Similar to UCC Article 8, under the PPSA and the Securities Transfer Act, 2006 (“STA”), versions of which are in force in all Canadian PPSA jurisdictions (harmonised legislation is in force in Quebec), a secured party can perfect its security interest in investment securities or shares by registering under the PPSA or by taking control under the STA (or both). An interest perfected by control has priority over one perfected only by registration or simple delivery of the unendorsed share certificates. One key difference between the UCC and the PPSA is how the regimes treat security interests in bank accounts. The concept of perfection by control is present in the UCC while not in the Canadian regime (with the exception of Quebec). Under Article 9 of the UCC, a security interest in a commercial deposit account may be perfected by control. Under the Civil Code of Quebec, it is possible to perfect hypothecs over cash deposits in bank accounts (referred to as monetary claims) by “control”, in a manner very similar to Article 9. Where the creditor is also the account bank, the creditor obtains control by the debtor (i.e., the account holder) consenting to such monetary claims securing performance of its obligations to the creditor. Where the creditor is not the account bank, the creditor obtains control by either: (i) entering into a control agreement with the account bank and the debtor, pursuant to which the account bank agrees to comply with the creditor’s instructions, without the additional consent of the debtor; or (ii) becoming the account holder. The PPSA does not have the same concept of perfection by control for cash deposits. The only way creditors can take a security interest in cash deposits is through registration of the interest. This is considered to be less advantageous than perfection by control as the secured party will have less certainty with respect to the ability to enforce their security. This is because other secured lenders may be able to assert that they have greater priority over the interest in the cash deposits. 1 2 3 4 5 6
Personal Property Security Act, RSO 1990, c P10, s 33. UCC § 9-103. Supra note 1 at s 63(1). Ibid at 63(4). Supra note 2 at § 9-611. Ibid at § 9-612.
Notice Periods One difference that secured parties should be aware of is the different notice periods required under the PPSA and the UCC for enforcing a security agreement should a party default on its obligations under a financing agreement. Under the PPSA, when a party has defaulted on its obligations, the secured party may dispose of the collateral in order to satisfy their debt.3 The PPSA requires that the secured party give not less than fifteen days notice in writing before the collateral is disposed of.4 Under the UCC, reasonable notice is required before collateral can be disposed of.5 For consumer transactions, reasonable notice is a question of fact.6 For commercial transactions, reasonable notice is deemed to be ten days.7 Lenders should be aware of these notice requirements before enforcing on their security. In addition to the applicable PPSA notice periods, lenders seeking to enforce security in Canada should be aware of the separate notice requirements imposed on secured creditors under Canada’s federal bankruptcy regime. Under section 244 of the Bankruptcy and Insolvency Act (Canada) (“BIA”), secured creditors must, in specific circumstances, deliver a 10-day notice of intention to enforce security (a “244 Notice”) (in a statutorily prescribed form).8 A 244 Notice is required in circumstances where the secured creditor intends to enforce on all or substantially all of the borrower’s inventory, accounts receivable, or other property that was acquired for, or used in, the borrower’s business.9 In addition, the borrower must be an “insolvent person” as that term is defined in the BIA.10
Applicable Regime As noted above, each state or province has its own legislation. Therefore, creditors should take note of which regime applies and the differences between those regimes. For tangible assets, the rule in the PPSA is that the legislation of the province where the asset is located will apply.11 However, under the UCC, the laws of the location of the debtor will apply to tangible assets.12 For intangible assets, the applicable regime is based on the location of the debtor. Except in Ontario and British Columbia, a debtor with multiple places of business is deemed to be located at its “chief executive office”. Under amendments to Ontario’s PPSA that came into force on December 31, 2015 and amendments to British Columbia’s PPSA that came into force on June 1, 2019, most debtors are deemed to be located in the jurisdictions in which they were incorporated or organised, similar to the more generally applicable debtor location rules under Article 9 of the UCC. In Quebec, for tangible property, the regime where the property is located would apply. For tangible property, it is the location of the debtor that is relevant.
Validity of Financing Statement In Canada, the length of validity of a financing statement and RPMRR registration in Quebec is variable. A secured creditor can elect the registration period of their choice at the time of registration. A perpetual registration is also available. In Canadian transactions,
7 8 9 10 11 12
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Ibid. Bankruptcy and Insolvency Act, RSC 1985, c B-3, s. 244. Ibid. Ibid. The BIA codifies both a cash-flow test and balance sheet test for “insolvent person”. Supra note 1 at s 5(1). Supra note 2 at § 9-301(1).
INTERNATIONAL FINANCE it is quite common to register for a period of time that exceeds the current maturity date plus a reasonable cushion of years to account for renewals and amendments based on agreement of the parties and to avoid a lapse in perfection. Under the UCC, the length of registration of a security interest is generally five years.13 Creditors should be aware of these differences and ensure that they diarize any variations of the renewal/expiry dates, in particular for transactions where both Canadian and UCC filings are in place, to avoid confusion.
Insolvency & Restructuring Insolvency law in Canada is governed by two main federal statutes, the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”). The latter functions for midsize and larger cases as Canada’s primary equivalent of Chapter 11 of the United States Bankruptcy Code, while the former contains both an equivalent to Chapter 7 and an abbreviated, simplified restructuring scheme used primarily in smaller cases. Insolvency proceedings under either statute will allow for a stay of proceedings against the company.
are generally prohibited from enforcing their security interests during the proceeding. While the CCAA contains many of the same types of relief available under Chapter 11, there are some differences of which secured creditors should take note. Specifically, Canadian bankruptcy law does not have a concept of “adequate protection” for pre-filing secured creditors whose collateral is being primed. In addition, debtors are not required to obtain specific permission to continue to use cash (which may form part of a secured creditor’s collateral) during the proceeding.
Conclusion In uncertain and financially unstable times, lenders may be looking to review and verify security arrangements to ensure they are properly protected and perfected in any downside scenario, and, in the worst case, prepared to take enforcement actions on short notice. While the regimes in Canada and the United States share many similarities, there are important differences lenders should be aware of when reviewing or putting in place new loans and security or considering enforcing on their security. Proactive steps taken by lenders to re-familiarize themselves with the differences between security regimes when reviewing loan portfolios and collateral documents will help to avoid unnecessary surprises when it comes time to enforce security.
In proceedings commenced under the CCAA, secured creditors are generally prohibited from enforcing their security interests during the proceeding. While the CCAA contains many of the same types of relief available under Chapter 11, there are some differences of which secured creditors should take note.
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BIA liquidation proceedings can take two forms, a bankruptcy proceeding (typically an unsecured creditor remedy) or a court-appointed receivership (typically a secured creditor remedy). In a bankruptcy proceeding, the stay of proceedings would not prevent a secured creditor from realizing on its collateral. However, if there is a court-appointed receivership, the order generally contains language which stays the actions of secured creditors. If a debtor commences a simplified restructuring proceeding by filing a notice of intention (NOI) to make a proposal under the BIA, a secured creditor’s right will automatically be stayed unless certain conditions are met. These include the secured creditor taking possession of the property before the filing, the secured creditor delivering a 244 notice (discussed above) to the debtor more than 10 days prior to the filing of the NOI or the debtor providing consent to enforcement of secured creditor rights. In proceedings commenced under the CCAA, secured creditors 13
Ibid at § 9-515(a).
Jeff Rogers and Maria Sagan are partners in the financial services group of McMillan LLP, and Tushara Weerasooriya is a partner in the restructuring group at McMillan LLP. The authors would like to gratefully acknowledge the contributions of Michael Hassar, articling student at McMillan LLP.
FIELD EXAMINATION >> GREEN & SUSTAINABLE FINANCE >>
WORKOUTS
RESTRUCTURINGS TRENDS
Collaboration and Flexibility Key to Workouts BY MARK KIRSONS
When first submitted for publication in February, this article predicted a recession of unknown origin. COVID-19 answered the question in March. While we don’t know how long the current health and economic crises will last, we know they are here, and that a meaningful number of lawyers and businesspeople have not encountered a widespread economic downturn. As a dear mentor has frequently reminded me, “It’s easy to make a loan. The trick is figuring out how it gets repaid, especially during tough times.” Troubled credits present unique and interesting challenges and opportunities for businesspeople charged with handling them, along with their legal advisors. The following is not an exhaustive list of every possible consideration which may arise during a workout, but rather acts as a refresher for those who have not been involved in a workout in some time, and as a primer for those less familiar with restructurings. It considers certain issues or concerns present at the onset of a workout or restructuring, and suggests certain solutions or actions one may take during the workout process (understanding that a detailed review of actions taken in bankruptcy are beyond the scope of this article). The related benefit is this article also serves as a guide for addressing certain items when preparing financing documents in order to avoid future problems. Many workouts start with a late-day call from a borrower to a lender indicating that it has a problem. For some, the initial reaction understandably may be one of frustration, panic or anger. Instead, look to understand the issue and what immediate steps may be taken to limit negative consequences resulting from it. Remain engaged with the borrower. What is the problem? Is there a mature or unmature default under the loan documents? For example, did the borrower breach a financial covenant? Does it have liquidity issues such that it cannot meet payroll obligations or service debt payments when due? Has the pandemic forced it to cease operations? Once you diagnose the ailment, start considering a remedy. Is the borrower seeking a short-term solution, like a waiver or amendment to address a discrete issue, or a longer-term plan of action, which may result in a complete restructuring of the credit or a bankruptcy proceeding? Will the lenders counter with a forbearance arrangement that keeps the applicable default outstanding, but provides the borrower time to resolve the problem it faces? Might government funds be available to support the borrower?
>> INTERNATIONAL FINANCE >> WORKOUTS & BANKRUPTCY >>
Understanding the issue, and requests being made in connection with it, are critical to a workout proceeding down the right path. While determining a course of action, ensure that financing documents work as intended, and that the parties understand their ongoing obligations. Will lenders be required to extend credit during the workout process? Check the funding conditions to see whether mature or unmature defaults MARK KIRSONS Partner, Sidley Austin LLP stop funding requirements. Consider whether grace or cure periods are available to the borrower, including equity cure rights, and what impact those have on whether a default, whether mature or unmature, exists. In an asset-based lending transaction, will the borrowing base provide sufficient availability to extend a requested loan? What reserves might be implemented during the restructuring? Will additional reporting be required from the borrower? Lenders may elect to make loans during a default in order to preserve collateral value or help save the borrower’s business. As a result, it may be premature to terminate funding commitments upon the occurrence of a default. In many cases, when a mature default is outstanding, lenders should deliver a reservation of rights letter to a borrower, noting the existence of the applicable default and indicating that the lenders may, in their discretion, act or refrain from acting in respect of such default. The letter states the lenders’ position that issues exist, and they retain maximum flexibility as to how to address them. Be cautious about exercising remedies too quickly. A borrower and its lenders often will be able to collaboratively and constructively work through a troubled situation. Legal limitations, such as providing a borrower’s employees with notice of the closure of a plant or mass layoffs, also may limit immediate actions taken by lenders. Lenders taking the wrong actions without fully understanding a situation may form the basis for lender-liability claims. A file review should occur at the beginning of most workouts. The review should consist of answering a series of questions about the applicable financing. The following is not exhaustive, but rather a sample of the types of questions one might need answered. Confirm the type of financing that was provided and whether future funding obligations exist. Audit the financing documents evidencing the transaction. Do you have all of them? Are they complete, including schedules and exhibits? Were they signed and dated, with all blanks having been completed? If your agreements contemplated post-closing deliveries or obligations, were those addressed, or do they remain outstanding?
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TRENDS & OUTLOOK Understand the covenants that bind the borrower and its subsidiaries. During the most recent robust credit cycle, many standard protections were removed from loan documentation or otherwise meaningfully limited. Unrestricted subsidiaries may operate outside of the parameters of the financing’s restrictions. Certain assets may have been contractually excluded from the lenders’ collateral package. Net debt provisions may have colored the borrower’s actual leverage profile. Certain investments, restricted payments and asset sales may not be subject to default blockers. A borrower may be able to do more than expected during a default. In a secured financing, consider the types of collateral supporting the credit. Does your security interest grant clause appropriately set forth the categories of Article 9 collateral in which you believe you should have a security interest? If you have an all-personal-property collateral package, check your grant clause against the definition of general intangibles set forth in Article 9, as that definition lists the various categories of personal property against which a lender may take an interest. What was missed, if anything? If the financing is secured by personal property, were appropriate UCC-1 financing statements recorded in the appropriate jurisdictions? If deposit or securities accounts constitute collateral, were appropriate control agreements put into place? Were security interests taken against types of personal property that require additional filings (for example, Federal filings against certain intellectual property, FAA and/or International Registry filings against aircraft and their engines, or ship mortgages against vessels)? If real estate secures the financing, were mortgages or deeds of trust recorded in the proper jurisdictions? Interests in insurance policies should be evidenced by the appropriate additional insured and lender losspayable endorsements. Were those obtained?
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After lenders have answered the foregoing types of questions, then they should consider the rights and remedies available to them while a default is outstanding, including any limitations on how and when they may be exercised. What notices must be delivered, and what lender votes are required? Understanding the terms and conditions of the loan documents helps shape the form of the restructuring plan. Subject to voidable preference and fraudulent conveyance concerns in a bankruptcy, and contractual limitations imposed by other debt transactions, lenders may have time to address issues surfaced during a file review in exchange for concessions requested by a borrower. Perhaps additional collateral is available or additional guarantees may be provided. Perhaps additional obligations may be secured by the borrower’s and the guarantors’ assets. New restrictions on activities that reduce the value of the borrower’s collateral or its enterprise value may be introduced. One should confirm which parties are required to repay obligations under the financing documents, as well as the types of obligations supported by guarantees or collateral. Obligors often agree to repay more than principal, interest, fees, and expenses. They may be liable for the payment of treasury management and derivatives obligations. What is the extent
Takeaways 1
Workouts and restructurings are dynamic and fast-changing. Lenders and their counsel benefit from being flexible, patient, creative and collaborative when handling troubled credits.
2
Understand a financing’s requirements. Provisions governing credit extensions, reporting, defaults and collateral take on new levels of importance during a workout.
3
Engage in a file review to determine if anything was missed at a transaction’s inception. Opportunities to solve problems may arise as part of a forbearance or waiver.
4
Lenders may need to interact with other creditor groups during a workout. Determine the rights of each group and what consents may be required from those groups.
5
Figure out a long-term plan. Some lenders may wish to live through a restructuring and bankruptcy, while others may look to quickly exit a troubled credit.
of those obligations, do the parties know the identity of the creditors that provided them, are there limits on the amounts which may receive the benefit of credit support, and where are they satisfied in a payment waterfall? Guarantees may be limited in amount, or available only upon the occurrence of certain defaults. Intercreditor arrangements may introduce limitations beyond those restrictions found in the principal loan documents. Cross-border financings present their own tax, legal and operational challenges. Ensure that actions taken during a restructuring comport with all applicable foreign laws and regulations, and consider whether U.S. tax liabilities will result from such actions. Many transactions completed since the last recession involve shared liens, second-priority liens, or crossing liens where certain creditor groups have first-priority liens on one pool of assets, and second-priority liens on another pool of assets. For example, asset-based lenders may have first-priority liens on current assets like accounts receivable and inventory, and second-priority liens on fixed assets like equipment and real estate. Term loan lenders likely have the first on the fixed, and the second on the current. These creditor groups are governed by intercreditor arrangements that include guidelines for how a creditor group may exercise remedies against collateral. Lenders must know what steps they may take with, or without, the consent of other creditor groups. With the growth of the institutional term loan market, the emergence of unitranche financings, and the increased use of FILO (first-in, last-out) financing tranches, different creditor groups will have different rights at different times. Their respective abilities to exercise remedies against collateral or receive collateral proceeds will be impacted by where they sit within a transaction. For example, term B loan lenders without the benefit of a financial maintenance covenant (like a leverage covenant) will not have an immediate cross-default to a revolving credit facility with such a covenant. The revolving lenders may be able to exercise certain remedies against an obligor group or its assets without the term
lenders having a corresponding right to do so, at least for some period of time, and the revolving lenders may be able to apply proceeds resulting from such exercise without sharing them with the term lenders. Depending on the nature of the default, the junior lenders in a unitranche financing may be able to control a restructuring process because the senior lenders will receive the initial proceeds resulting from any exercise of remedies. Once triage is completed with respect to the initial default or other event, the lenders confirm how their financing documents work, and they understand the nature of future interactions with other creditor groups, then they will be able to move to the next phase of the process. What does the borrower want, and do the lenders want the same thing? The financing may be relationshipdriven, such that the parties work together to see the borrower through its troubled situation. This may include the borrower’s retention of a restructuring advisor, the approval of asset sales with proceeds repaying debt, or venturing into new lines of business. This also may include lenders providing a debtor-inpossession financing during a bankruptcy. Alternatively, a borrower owned by a privateequity sponsor may receive cash injections to keep its business afloat through the troubled situation, as well as reduce the borrower’s outstanding indebtedness. There may be other instances where the lenders must exit the credit quickly, in which case they will pursue a loan sale. However, they must understand what rights the borrower may have to consent to such a sale, and if the financing papers provided for a disqualified list of parties to whom sales are prohibited. Some lenders may be prepared to live through a restructuring or bankruptcy in order to ultimately acquire the borrower’s business, whether through a negotiated transfer or a successful credit bid in bankruptcy. The current economic crisis has resulted in a variety of government-sponsored financing programs that may benefit troubled businesses. The endgame may change over time, so lenders need to be prepared to pivot if circumstances change.
benefits and ensures peak performance, refreshing one’s restructuring skills (or newly acquiring them) will ensure peak performance when handling a troubled credit. Be prepared to understand a borrower’s troubles. Be cautious about jumping to remedies. Be ready to formulate a game plan, whether short- or long-term. Seek out guidance from those who have lived through tougher times, and understand why flexibility matters in a restructuring. Understand the nuances of various relief programs that may be available to help solve issues. Stretch in these ways, and you’ll be ready for your next workout. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.
The financing may be relationship-driven, such that the parties work together to see the borrower through its troubled situation. This may include the borrower’s retention of a restructuring advisor, the approval of asset sales with proceeds repaying debt, or venturing into new lines of business.
Just as stretching before exercise maximizes a workout’s
Mark R. Kirsons is a Chicago-based partner in Sidley Austin LLP’s Global Finance Group. He focuses on syndicated, leveraged and asset-based finance, along with workouts and restructurings.
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