PRESENTATION TO SECURED TRANSACTIONS SUBCOMMITTEE OF THE COMMERCIAL FINANCE COMMITTEE APRIL 11, 2014 DANIELLE V. GARCIA, BLANK ROME LLP

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1 PRESENTATION TO SECURED TRANSACTIONS SUBCOMMITTEE OF THE COMMERCIAL FINANCE COMMITTEE APRIL 11, 2014 DANIELLE V. GARCIA, BLANK ROME LLP AGREEMENTS AMONG LENDERS IN UNITRANCHE FACILITIES I. Basics of a Unitranche Facility A. One Tranche of Debt seen by the Borrower Two or More Created by an Agreement Among the Lenders or AAL B. Differences from a First Lien/Second Lien Structure 1. One set of loan documents 2. One lien securing all obligations granted to either one Agent for the whole facility or the Collateral Agent (as opposed to the Administrative Agent) 3. One Agent (or Administrative Agent) administering the whole facility including collecting and remitting payments 4. Remedies taken by one Agent/Collateral Agent C. Costs/Benefits of a Unitranche Facility 1. Benefits 2. Costs a. Preferred by borrowers as it limits transaction costs and time needed to close the transaction. Particularly useful if costs of perfecting liens are higher than average b. If there is blended pricing, may make evaluating competing facilities easier for borrowers c. For first out lenders, de facto payment subordination a. Facility may be under-secured in a bankruptcy, leaving an otherwise fully-secured first out lender with no ability to get postdefault interest and expenses.

2 b. Loss of control no longer administering a facility of similarly situated lenders II. Typical Terms of an Agreement Among Lenders A. Defines First Out vs. Second Out Obligations (will create an A and B term loan out of one term loan if not designated as such in the Credit Agreement) B. Payment Waterfall (if not in Credit Agreement) 1. Often bank products and hedges will be included with the first out obligations only to the extent they were reserved against the borrowing base 2. Payments vs. Proceeds of Collateral a. Until a payment application event (typically a payment default, an insolvency, an acceleration or any other default that the required first out lenders have elected to deem a payment application event), all scheduled payments, mandatory prepayments and voluntary prepayments (if permitted) are applied to the applicable obligations in the ordinary course. During a payment application event, all payments and proceeds go to the first out obligations until paid in full, then the second out. b. Proceeds of collateral received in connection with the exercise of remedies (as opposed to normal collection of A/R via a dominion account) are applied to the first out obligations until paid in full and then to the second out obligations c. split collateral waterfalls more recent development where proceeds of A/R and inventory (and any assets specifically supporting a first out term loan) are applied to the first out obligations, then the second out. All other proceeds go to the second out first until paid in full C. Delineates the Fee Split or Skim (if applicable) 1. First Out wants to be clear that skim is only on what is collected 2. Second Out wants to be able to collect skim if amounts are charged to the revolver

3 D. Voting 1. Drag Along Most important to Second Out Lenders. Things that the required (typically 51% of their tranche) second out lenders can amend/waive/consent to in the Credit Agreement with deemed consent from the first out lenders a. Second Out can modify financial covenants only within a set percentage from the existing covenant levels b. If financial performance is within set parameters, Second Out tries to controls all modifications to the Credit Agreement 2. Sacred Rights Most important to First Out Lenders. Things that cannot be amended/waived/consented to in the Credit Agreement without the actual consent of the required lenders for each tranche a. Will include the typical all lender/each affected lender consent items in the Credit Agreement b. For first out lenders, should include changes to the borrowing base, collateral reporting and financial reporting that benefit the borrower and also try to include fundamental changes (like a change of control, major acquisitions or major debt incurrences), ability to have cash dominion, and not making the financial covenants springing. Language must be parsed carefully to make sure nothing is missed. 3. Imposing Default Interest The required lenders for each tranche are able to require that Agent/Administrative Agent to impose default interest on their respective tranches. E. Exercising Remedies 1. Typically the First Out Lenders have the first right to commence remedies subject to a standstill of days 2. If the First Out Lenders do not elect to exercise remedies, the Second Out Lenders may then commence remedies. 3. Who controls exactly which remedies are taken? Language of the agreement needs to be clear that the first to act is in control. Much easier to enforce if you are the Agent/Collateral Agent

4 4. Bankruptcy a. These agreements have not been tested in bankruptcy; unlikely to have the holders of the two tranches deemed separate classes b. Many agreements are silent on how/whether a DIP financing can be offered c. Roll-up likely not possible F. Limits on Overadvances and Protective Advances G. Buy-Out Right 1. Typically structured in the same way as under an Intercreditor Agreement 2. Should apply to all of the first out obligations but sometimes will exclude bank products and hedges which exceed the related reserve H. Right of First Offer or Right of First Refusal on Sales of First Out Obligations (should apply to a true sell-off, sell-down, not to portfolio sales or sales among first out lenders/their affiliates) III. Areas of Particular Concern for First Out Lender A. Maintaining both Administrative and Collateral Agent roles B. Minimum Hold to Exercise Voting Rights and/or Enforce the Agreement as Against the First Out Lenders C. Maintaining Protections in the Credit Agreement After a Buy-Out of Less than All of the First Out Obligations Second Out should agree not to release any lien securing hedges or bank products and not to change the language of the credit agreement as to those obligations D. If a ROFO or ROFR is exercised, Last Out Lender Not Permitted to Vote its First Out Position E. Maintaining Credit Agreement Provisions Needed by Banks AML covenants/protections, capital adequacy, savings language for non-qualified hedge counterparties, any other hot buttons for the bank s in-house counsel F. Maintaining Control of Borrowing Base Decisions Second out cannot increase the borrowing base, but typically does not allow changes that increase the borrowing base try to get at least a percentage of increase that the first out lenders can allow without second out consent.

5 G. Difficulty in Syndicating the Facility many first out lenders will not want to buy in to an AAL with a second out lender they do not have a relationship with. H. Borrower Has No Visibility to Terms of the Agreement - makes managing the relationship with the borrower harder; dealing with borrower requests that would not otherwise require second lien approval now require consent of all lenders IV. Areas of Particular Concern for Second Out Lender A. Being the Collateral Agent/Limiting the Ability of the First Out Lender to Act in a Manner Contrary to the Last Out Lenders Interests B. Limiting Payment Blockage try to have waterfall apply only to proceeds of collateral after an exercise of remedies or payments received after acceleration C. Limiting the First Out Obligations (such as bank products, hedges and overadvances) D. Ability to Make Protective Advances if the First Out Lender Will Not E. Ability to have Second Out Obligations (like fees, interest and expenses) charged to the Revolver which effectively makes them First Out obligations F. Making sure that Assignees of the Second Out Lenders and First Out Lenders are benefitted/bound by the agreement ROFO and ROFR help here