Structuring Uptier and Drop-Down Financing Transactions: Crafting Loan Terms to Manage Exposure and Mitigate Risks

LMTs have become commonplace over the past few years and they typically take the form of either drop-down or uptiering transactions, or some some combination of both, or a "double dip" or a double dip with a "pari plus." With a drop-down transaction, the borrower forms and transfers collateral for its existing debt to an unrestricted subsidiary, allowing the subsidiary to incur new debt secured by the contributed assets and resulting in such assets no longer being available to secure the original debt. In an uptiering transaction, the borrower incurs new debt provided by a group of lenders, usually a subset of the existing lenders, resulting in the debt owing to the other existing lenders being subordinated to the new debt.

Once a disfavored strategy, LMTs have become an alternative strategy for companies and their sponsors to attempt to navigate near-term financial headwinds (e.g., a challenging liquidity position or upcoming maturity wall). LMTs allow borrowers to "realign" their capital structure by working with select creditors and stakeholders to issue new senior-secured indebtedness using controversial interpretations of the covenants in the borrower's existing financing documents and to the detriment of the "excluded" lenders.

Recent high-profile cases (e.g. Serta Simmons and Mitel) have held that a technical reading of some financing documents will determine whether the liability management transaction is permitted under the applicable credit documents or not. But in any event, many market participants have expressed concern that these transactions violate the spirit of such documentation and upend the fundamental tenets of the loan market as to the senior secured position for which institutions have bargained.

Reconciling the competing interests of borrowers and lenders when negotiating the provisions of loan documents is challenging. While market conditions will dictate a borrower's or lender's negotiating leverage, both sides have the incentive to agree to clear, comprehensive, and unambiguous language to reduce the likelihood of future litigation.

Listen as our panel of experts provides an overview of the structural elements of uptier, drop-down and double dip transactions and examines practical changes that may be made to loan documentation to address the concerns of lenders and borrowers and the development of cooperation agreements in an effort to protect lenders when an existing document may not.

I. Types of LMTs

A. Drop-down transactions

B. Uptiering transactions

C. Double dip, etc.

II. Competing objectives with drop-down and uptier transactions

A. Lender's perspective

B. Borrower's perspective

III. Recent developments in LMT litigation and restructuring strategies (Serta Simmons; cooperation agreements)

IV. Liability management-related provisions that parties should consider when negotiating loan documents: traps and twists

A. J. Crew blocker

B. Unrestricted subsidiaries and the Robertshaw twist

C. Envision blocker

D. Dealing with the Pluralsight twist

E. Chewy protection

F. Serta provisions

G. Incora blocker

H. Exit and entry consents

I. Defining "open market purchases"

J. Dealing with the "double dip"

V. Key takeaways and practical considerations

A. Rethinking loan documentation based on market conditions and recent cases

B. Tailoring loan documentation to fit the particular transaction: no one-size-fits-all solution

The panel will review these and other key issues:

• How are drop-down and uptier transactions structured?
• What are the competing objectives for lenders and borrowers with LMTs?
• How should the risks associated with LMTs be addressed in loan documents?
• What are the recent developments in LMT litigation and restructuring strategies?