The new trend of "superpriority" rescue financings: Implications for existing priority creditors

The use of corporate debt has ballooned during the economic expansion following the credit crisis over ten years ago. US markets are awash in more than $9 trillion in debt offerings, much of it held by institutional investors in “tranches” of collateralized debt obligations. Reduced revenues and profit shortfalls across many industries, caused by the coronavirus disease 2019 (COVID-19) pandemic, have resulted in a great deal of stress on these markets. Many corporations, including those held as portfolio companies in private equity funds, lack the ability to continue servicing their debt, but also need rescue financing to continue operations during the slowdown. As a result, it is not surprising that many companies are trying to structure financing solutions that allow them to attract new investors, including through the subordination of existing first-lien debt.

A recent industry trend is to create “superpriority” debt structured to circumvent protections in the credit agreement that typically require the consent of any adversely affected lender. To do so, the borrower works with a group of lenders, including a majority of existing first-lien lenders, to create a new credit facility.  The participating first-lien lenders then enter into a transaction support agreement in which they agree to use their majority position to (i) amend the existing credit agreement to authorize the borrower to incur new liens, which secure the new facility via a lien on the same collateral as that securing the loans under the existing credit agreement and (ii) amend the existing intercreditor agreement to provide for the payment of the new debt before the existing first-lien debt.  All that’s left to do is have the favored lenders exchange their old debt into new superpriority debt, resulting in a new class of favored lienholders.

Generally speaking, such modifications are contractually consistent with the credit agreement, in that using existing liens to secure a new credit facility does not technically constitute a release of collateral or the value of the collateral. Further, since many waterfall provisions have boilerplate language that make them subject to intercreditor agreements “in all respects,” modifications to the intercreditor agreement may have an impact upon, but not violate, the waterfall provisions.

A coming wave of restructurings involving new “superpriority” financing

The workarounds described above are likely just the beginning of a wave of restructurings as existing debt holders, corporations and new investors attempt to strike a balance between the priority of existing debt and the need to raise additional capital to stay afloat during these unprecedented times. Debtors, lenders, investors, and collateral managers should carefully examine credit agreements to assess the risk of a restructuring that could have the practical impact of subordinating heretofore first-lien debt.

Litigation is likely to follow many of these restructurings as corporations and other debtors seek additional financing, while existing creditors fight to maintain their priority interests. Stakeholders in these matters should consult with knowledgeable counsel, not only about the restructuring, but also about potential litigation between the corporation and the existing secured debt holders who were left out of the new structure.

If you have any questions about this industry trend and its implications, please contact the authors or your DLA Piper relationship attorney or a member of the DLA Piper Private Fund Disputes team.

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This information does not, and is not intended to, constitute legal advice.  All information, content, and materials are for general informational purposes only.  No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.