Clifford Chance
First Lien Lenders Beware: Drafting Points to Consider
4 February 2011
Intercreditor agreements are intended to prevent shared collateral from becoming a battleground in a distressed credit restructuring or bankruptcy. Creditor groups benefit by defining their relationship with each other before, rather than after, a debtor encounters financial difficulty. Historically, these agreements have been designed to enable senior creditors to control the disposition of collateral and to receive payment in full ahead of junior creditors, but well-organized junior creditors can also use them to gain valuable rights.
Last year we wrote in this column about the model first lien/second lien intercreditor agreement drafted by a task force of the Committee on Commercial Finance of the American Bar Association’s Business Law Section. We noted the growing importance of the second lien lender market and the objective of such task force to address the commercial finance industry’s need for greater clarity and certainty in intercreditor agreement provisions.
Today we look at two recent federal court opinions dealing with intercreditor agreements (one of which specifically cites the ABA model intercreditor agreement). Both opinions arose from bankruptcy cases in the Southern District of New York. Both involved sales of substantially all of the debtors’ assets pursuant to §363(b) of the Bankruptcy Code. In both instances, an intercreditor agreement failed to provide the desired protection for the first lien lenders, although for very different reasons. Finally, in both cases, the victories of the second lien lenders could have been prevented. As such, we discuss these cases to highlight points first lien lenders should consider when drafting or enforcing intercreditor rights.
This article was first published on 3 February 2011, New York Law Journal - Corporate Update (Volume 245 - No. 23).
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First Lien Lenders Beware: Drafting Points to Consider
