Major Intercreditor Issues in
Multi-tranche Project Financing
Transactions
John D. Taylor
June 9, 2005
Sample Financing Structure
Indenture/Note
Purchase
Agreement
Project
Company
Borrower
Common
Agreement
Capital Markets
Lenders
Loan
Agreement
National
Development Lender
Loan
Agreement
Multilateral
Financial Institution
Loan
Agreement
Lead Commercial Banks
as Agents/Underwriters
Security Agreements:
Cash Collateral Agreement
Pledge Agreement
Assignment Agreement
Mortgage
Syndicate of
Commercial Banks
Collateral
Agency/
Trust
Agreement
Political
Risk
Guarantee
Collateral
Agent/
Trustee
Export
Credit Agency
2
Elements of Intercreditor Agreement
•
•
•
•
Appointment of Intercreditor Agent
Sharing Provisions
Voting/Decision-making
Default/Remedial Action
3
Sharing Provisions
• General Rule: Pro Rata Sharing
 Payments
 Security
• Some Exceptions
 Separate Security (pledge of additional security,
additional reserve account, etc.)
 Political Risk Insurance Proceeds
 “Preferred Creditor” Status
4
Voting/Decision-Making I → Who Decides?
• Allocating Voting Power
 Purely Proportional
 Consensus
 800-pound Gorilla
• Lender Goals
 Efficiency
 Minimize Hold-out Risk
 Protect Key Interests
5
Voting/Decision-Making II → How Are
Decisions Made?
• Role of Agent
 Unilateral Action: Agent as decision-maker
 Group Action: Agent as decision-facilitator
• Voting Mechanics
6
Lender Decision-making Timeline
Triggering
Event/
Borrower
Request
Agent
Solicitation
Voting
Deadline
Lender
Decision
Consultation/Voting Period
7
“Required” Lenders
Lender Voting Group
Description/Comment
Examples
Unanimous Lenders
Fundamental matters for which each
lender must consent/approve
Tenor/pricing of loans; release
of collateral
Supermajority Lenders
Fundamental matters for which
lenders seek a “heightened” voting
threshold
Incurrence by Borrower of
additional debt; amendments
to security documents
Majority Lenders
A common “baseline” for decisionmaking relies on majority rule
Approval of budget; approval
of insurance arrangements
Single Lender (Veto Right)
Matters for which a lender requires a
veto right due to its heightened
sensitivity to matter
Environmental matters;
potentially matters identified
in Credit Committee approval
Single Lender (“Interested”
Lender)
Matters that are only of interest to
individual lender
Non-material changes to a
lender’s facility agreement
8
Default/Remedial Action
• Goals - Requirements vs. Reality
• Procedures - Notice of Default/Consultation
Period/Waiver or Exercise of Remedial Action
9
Remedial Action – Decision-making
Default
Agent Notice
to Lenders/
Request for
Instruction
If Necessary
Lenders agree
to waive
WAIVER
If Necessary
Lenders elect to
enforce
remedies
Remedial
Action
If No Lender
Decision/
Commencement
of WAITING PERIOD
If Necessary
Lenders
subsequently
agree to waive
WAIVER
No Remedial Action
until requested by
Required Lenders –
STEP DOWN–MECHANIC
10
Remedial Action – “Step Down”
Non-Fundamental Default
100
Fundamental Default
% of
Lenders
66⅔
51
30 Days
90 Days
60 Days
120 Days
Time
11
Swap Provider Issues
• Risks and Benefits of Swap Involvement
• Nature of Swap
• Coordination and Integration of Swaps
 Swap Voting Rights
 Swap Termination Rights
 Swap Termination Payments
12
Equity-related Intercreditor Issues
• Role of Borrower
 Borrower Interest in Intercreditor Matters
 Spectrum of Structures
• Sponsor Debt
13