Structuring, Negotiating and Documenting Junior Debt products (& Unitranche)

NOTE THIS IS AN INTENSIVE PROGRAMME & MAY NOT BE SUITABLE FOR BEGINNERS

Many of the issues discussed in the section on Mezzanine apply and are relevant to many other forms of junior debt

Introduction to the Junior Debt Spectrum

• Overview of the market

• The role of private credit

• Review of the various products Mezzanine Financing

• PIK, PIYC / Toggles

• Second Lien

• Preference shares

• Unitranche Finance

Structuring parameters – how much senior and how much junior debt

• Typical approaches to gauging debt capacity/capital structure

• What are the key criteria to consider?

• Multiples vs Capital approach

• Key ratios (covenants where relevant) used to right-size the debt

• How Jurisdiction can affect debt capacity (and how to mitigate)?

• CASE STUDY: Calculate the total funding uses and sources for a deal based on the management case

Types of Mezzanine: use and key issues

• Review of the mezzanine market

• Warrantless mezzanine – coupon structure Fixed vs floating rate

• Cash pay

• PIK

• Redemption premia – stepped vs linear

• Other tools for achieving the target IRR

• OID to enhance returns

• Using Libor/Euribor floors

• Fees

• Call protection - hard vs soft call protection

Warranted mezzanine

• Equity Kickers

• Strip Equity – why they make sense

• Other forms of structured strip equity carry

Issues for junior lenders

• What is an ‘exit’ – hard vs soft

• Information rights – what are the options

• Board / Observer status – risk and how to mitigate them

• Other (better) options

CASE STUDY: Calculate and comment on the equity value on exit, the return (IRR/cash multiple) required by the mezzanine, the return of the equity and return for the management

Mezzanine in Emerging markets – specific problems and how to resolve them

• The different roles of junior debt/mezzanine developed markets

• Key issues Legal risk – why and how it matters

• Tools for mitigating legal risk

• How to structure the mezzanine deal & collateral to overcome

• Reputation issues

• Recourse / PGs?

• Other tools

Second Lien

• Use and application

• Market trends / recent deals

• Documenting the 2nd Lien - composite or separate facility agreement

• “Typical” terms, leverage, pricing and call protection

• Pros and cons of 2L vs Unitranche finance, high yield bonds

• Other tools for achieving the target IRR

PIK (PIYC, PIYW, Toggles)

• Pay-in-Kind (PIK) generally

• Different types PIK PIYW / Toggle

• PIYC

“Typical” terms, leverage and pricing

Call protection - hard vs soft call protection

Market trends / recent deals

Preference shares

• Prefs defined – key features

• How to structure Prefs to maximise value creation and preserve yield

• Potential features Convertible into equity (including Ratchets)

• Redeemable (at par or a premium)

• Participating - in profits

• Cumulative (yield protection)

• Voting rights

• Security

• Worked example

Unitranche structures

• The “classic” Unitranche structure

• Bifurcated Unitranche

• Bilateral vs. Clubbed Unitranche

• Pros and cons of Unitranche

• Use and application of unitranche

• Review of ranking in different deals SSRCF, Unitranche A, Unitranche B and Hedge

Facility size and leverage

Mezzanine Intercreditor issues

• Relevant Documentation – the LMA Precedents The Leverage intercreditors agreement (2009 & @012)

• Real Estate intercreditors agreement

Payment Stop Notices

Option to Purchase (theory vs practice)

Enforcement Standstills

Turnover clause

Step-in rights for the junior lenders

Protection for junior lenders

Information & Fees

Valuation issues

Key differences in Unitranche intercreditor

Training Objectives

• Overview - Understand the dynamics of the junior debt spectrum and the various types of junior debt on offer

• Structuring the deal – the programme provides a framework or toolkit for participants (from all jurisdictions) to identify the critical structuring issues that the parties need to address in structuring junior and super senior debt. Participants will be able to use this toolkit to determine how to structure deals in any jurisdiction

• Subordination and ranking – Ranking and subordination are critical in the mezzanine deals with junior debt to all parties, senior lenders, the equity providers and the junior lenders themselves. Moreover, is not clear whether contractual subordination (i.e., Intercreditor Agreements) is legal or effective in many jurisdictions and the programme considers ways in which this may be overcome

• Debt Financing  – There is a very wide range of junior debt funding instruments each with its own pros, cons and application. Participants will learn about the various instruments, their use and application and the key terms and conditions which attach to each instrument

• Equity Kickers – Equity matters to junior lenders as it helps the overall return. Participants will review the various ways an equity-kicker can be structured for both sponsored mezzanine deals and also in corporate deals where warrants are not usually a viable option

• Managing the investment – junior lenders invariably need and require a greater degree of visibility into their investment. This is a potential trap for lenders who might easily fall into the trap of being shadow directors (with all the risks that entails). The programme reviews the various options open to the lenders and considers the pros and cons of each of managing the information flow and their exposure

• Intercreditor issues in Unitranche vs Mezzanine deals  – these become live in distress, however, there are significant and material differences between the intercreditor used in traditional junior debt products (e.g. mezzanine and second lien) and unitranche intercreditor not least in relation to the instructing group (i.e. who controls the enforcement) and standstills. The programme reviews the current state of play in the market in this dynamic field

Training Course Summary

The junior debt training programme provides participants with a thorough understanding of the various junior debt products, their terms and conditions, how they are documented and also the key issues which arise in a restructuring scenario.

The last few years have witnessed copious amounts of liquidity in the credit markets and senior debt has been readily available. The coronavirus has and will have a dramatic effect on the global economy not least that it is likely to lead to a contraction in bank lending.

If history is anything to go by, then we can expect junior debt to come to the fore to fill the funding gap. In addition, the presence of direct lenders, who were absent after the global credit crisis, stand ready to fill the funding gap albeit at a price!

This junior debt training programme examines the range of junior debt loan products available in the market, their use and application, the typical terms and conditions, market pricing and returns. The junior debt training program also considers the various techniques junior lenders can adopt to structure their credit ab initio (via Intercreditor issues), how they can monitor their credit thereafter (and have advanced warning of impending distress) and finally how they can maximise recovery in distress. The junior debt training course is highly practical and interactive and will include case studies which will first, require participants to devise appropriate junior debt structures and second, to consider the various Intercreditor and other matters which can protect their position in distress.