1 Client Alert B EIJING FRANKFURT HONG KONG LONDON LOS ANGELES MUNICH NEW YORK SINGAPORE TOKYO WASHINGTON, DC FORWARD START FACILITIES Brrwers faced with uncertainty n whether they will be able t refinance existing debt at maturity if the credit crisis cntinues nw have a new prduct t cnsider: the frward start facility (an FSF ). This Client Alert cnsiders the key features f an FSF and particular issues that may arise when FSFs are used. What is a Frward Start Facility? An FSF is a facility under which lenders under an existing credit facility (the Existing Facility ) cmmit, well in advance, t prvide financing t repay the Existing Facility at its maturity. On the date that the Existing Facility matures, the FSF can be drawn t repay it. Lenders wh participate in an FSF (the FSF Lenders ) prvide cmmitments at least equal t their cmmitments under the Existing Facility. In exchange, they receive payments representing incremental increases ver the interest margin and the fees payable under the Existing Facility. These tp-up payments are designed t ensure that FSF Lenders enjy an immediate marked t market increase in the aggregate amunt paid fr their existing cmmitments (funded and unfunded) under the Existing Facility withut increasing their verall expsure t the brrwer. The brrwer, in turn, lcks in the terms and pricing f a cmmitted lnger term facility, in essence refinancing itself by extending its existing facilities. The FSF is an elegant tl because it bypasses the unanimus lender cnsent that nrmally wuld be required t extend an Existing Facility. An FSF is flexible because it can grw as existing lenders chse t participate in it. Of curse, until the aggregate cmmitments under the FSF equal amunts due at maturity f the Existing Facility, the brrwer faces an unfunded shrtfall at maturity. Hwever, the expectatin is that existing lenders will migrate int an FSF given the bvius benefit f an immediate uplift in aggregate pricing fr the Existing Facility with the tpup frm the FSF. As they d s, the FSF grws int a full refinancing. Wh are the parties t an FSF? The initial parties t an FSF are the brrwer and sme f the lenders under the Existing Facility. FSF Lenders cmmitments are effectively stapled t their cmmitments under the Existing Facility. If an existing lender des nt wish t participate in the FSF, FSF Lenders may assume increased verall cmmitments r new banks may be invited t participate in the FSF t fill the refinancing gap. This Client Alert was prepared by Mark Plenderleith and Leigh Schulz f Milbank s Tky ffice and Suhrud Mehta and Tm Siebens f Milbank s Lndn ffice. Fr further infrmatin, please cntact them r any ne f the Milbank finance attrneys listed at the end f this Client Alert. Lndn: Suhrud Mehta Thmas Siebens Tky: Mark Plenderleith Leigh Schulz In additin, if yu wuld like cpies f ur ther Client Alerts, please cntact any f the attrneys listed. Yu can als btain this and ther Client Alerts by visiting ur website at and chsing the Client Alerts & Newsletters link under Newsrm/Events. This Client Alert is a surce f general infrmatin fr clients and friends f Milbank, Tweed, Hadley & McCly LLP. Its cntent shuld nt be cnstrued as legal advice, and readers shuld nt act upn the infrmatin in this Client Alert withut cnsulting cunsel Milbank, Tweed, Hadley & McCly LLP. All rights reserved. Attrney Advertising, prir results d nt guarantee a similar utcme.
2 FORWARD START FACILITIES 2 What are the key features f an FSF? Interest: FSF Lenders receive an additinal payment under the FSF which effectively tps up, frm the effective date f the FSF, the interest margin payable in respect f amunts drawn under the Existing Facility. Given the increase in pricing fr risk, this feature can bring the aggregate margin int line with current market pricing. In a recent example, a Eurpean cmpany agreed t a seven-fld increase in its current margin t allw it access t a revlving credit facility in Upfrnt and Cmmitment Fees Upfrnt Fees: In effect, FSF Lenders will be rlling ver their cmmitments (r prviding new cmmitments) n the date the FSF is drawn (i.e., at maturity f the Existing Facility). Accrdingly, they will expect t receive an upfrnt fee. A brrwer may ffer an additinal early bird fee t existing lenders that cmmit early as FSF Lenders. Tp-Up and Additinal Cmmitment Fees: T the extent that FSF Lenders have un-funded cmmitments under the Existing Facility, they expect t receive fr their cmmitments under the FSF an additinal r tp-up cmmitment fee t reflect the difference between current market pricing and cmmitment fee levels under the Existing Facility. T the extent the cmmitments f FSF Lenders exceed their funded cmmitments under the Existing Facility, thse FSF Lenders receive cmmitment fees under the FSF in respect f the excess cmmitments. Once the FSF is drawn and the Existing Facility repaid, interest and cmmitment fees are payable slely under the FSF. Other features Other terms f an FSF typically are based n the terms f the Existing Facility but may be mre nerus in certain respects such as financial cvenants. An FSF is structured s that it is: available n and frm the date that the Existing Facility matures; subject t dcumentary and ther cnditins precedent at least as cmplete as the cnditins precedent under the Existing Facility. FSF Lenders may seek additinal cnditins. It will be interesting t see whether market practice develps t allw FSF Lenders t refuse funding, under s-called MAC clauses, due t materially adverse changes in market cnditins r brrwer-specific circumstances; used nly fr the purpse f refinancing (in whle r in part) the Existing Facility; and cancelled t the extent f any mandatry cancellatin r reductin f the Existing Facility. What issues arise in relatin t an FSF? Nn-Cnflict: An FSF must nt cnflict with the Existing Facility. In particular, bligatins f the brrwer in respect f the interest and cmmitment fee tpups described abve culd result in a breach f the Existing Facility. One slutin is t dcument these uplifts as fees, payable quarterly. Whether such fees infringe the terms f the Existing Facility requires careful cnsideratin. The treatment f these amunts under financial cvenants in the Existing Facility als needs t be cnsidered.
3 FORWARD START FACILITIES 3 Amendments and Waivers: During the term f an FSF, FSF Lenders are likely t require the right (but nt have the bligatin) t make amendments t the FSF that match amendments, if any, t the Existing Facility. Alternatively, r in additin, the FSF may prhibit the FSF Lenders frm agreeing t amendments under the Existing Facility unless crrespnding amendments are made under the FSF. Timing f drawdwn and security: Typically, the full amunt f the FSF is drawn at the same time t repay the Existing Facility when it matures. In sme instances, it may be pssible fr the FSF t be drawn t refinance a single tranche f maturing debt under the Existing Facility. The remainder f the Existing Facility and the FSF wuld then cntinue t exist side-by-side, with terms that ensure that bth facilities are pari passu bligatins f the brrwer. This wuld typically require at least a tw-thirds majrity apprval under the Existing Facility (t apprve the incurrence f debt by the brrwer under the FSF). If the Existing Facility is secured, partial drawings f the FSF n a secured basis will be challenging, thugh nt always impssible, unless intercreditr and security dcuments are capable f being amended withut unanimus lender cnsent t accmmdate the FSF. The mst significant challenges are identified in the highlighted sectin belw. Partial Refinancing f Leveraged/Secured Financings Partial refinancing f a senir secured facility using a secured FSF presents a number f challenges, because the FSF needs t be integrated int the existing intercreditr and security framewrk. Mst leveraged transactins d nt cntemplate a separate pari passu and secured facility which shares in existing security. T implement such a facility nrmally requires amendments t the intercreditr agreement and, mst likely, junir lender cnsent. In rder t avid such amendments and cnsents, an FSF wuld need t be incrprated int the Existing Facility. Principal challenges t ding this are as fllws: The Existing Facility must permit structural adjustments. Pursuant t a typical structural adjustment prvisin, the majrity lenders plus all lenders assuming a new cmmitment (i.e., the FSF Lenders) may apprve the incurrence f a new facility (i.e., the FSF) within the Existing Facility. If the intercreditr agreement prtects junir r mezzanine creditrs by restricting the incurrence f additinal debt, cnsent f the majrity junir creditrs will be required, unless the amunt f the FSF debt falls within the agreed amunt f senir headrm. In many jurisdictins where security has been granted, amending the Existing Facility t accmmdate the FSF will result in the security being deemed t have been released as a result f the amendment. Accrdingly, it will be necessary t re-take security and existing lenders will need t accept new hardening perids. Security fr new debt usually autmatically ranks behind security held by existing secured creditrs. This is a particular prblem where junir creditrs hld security. Althugh it may be pssible t reslve this by amending the intercreditr agreement, in all likelihd, junir creditrs will need t release their security and re-take it t facilitate the prcess. Releases f security typically require 85% t 100% lender cnsent, making it difficult t achieve as a practical matter. Cnclusin: Given the abve issues, except in the case where the Existing Facility is the nly secured facility in the grup, it can be very difficult t partially refinance the Existing Facility by integrating FSF debt n a secured basis int the Existing Facility.
4 FORWARD START FACILITIES 4 In light f these issues mst, if nt all, f the initial FSFs t date have been implemented either in an unsecured (investment grade) cntext r are designed t result in a full refinancing f the Existing Facility in a single drawing, allwing FSF Lenders t take security ver assets released frm the security fr the Existing Facility. N duble-expsure: It shuld be clear, assuming the FSF is cnstructed as described abve, that lenders with cmmitments under the FSF and Existing Facility d nt have a duble credit expsure t the brrwer prir t the refinancing date. Nnetheless, capital treatment will need t be cnsidered by banks t ensure that n additinal capital csts arise fr them. As is the case in any refinancing, particularly in a secured cntext, refinancing mechanisms and the applicatin f prceeds will need t be cnsidered carefully t ensure that FSF Lenders are nt expsed t intervening risks n the funding date. Defaulting Lenders: Even if the Existing Facility des nt cntain prvisins dealing with inslvent r defaulting lenders, brrwers will expect the FSF t cntain prvisins which mitigate the risk f FSF Lenders defaulting n their cmmitment t refinance the Existing Facility. An FSF fr bnds? Brrwers face refinancing risk with respect t bnds, just as they d fr syndicated lans. Given the lgistical difficulty f entering int bilateral agreements between an issuer and individual bndhlders, an FSF in the bnd wrld mst likely wuld take the frm f an exchange ffer f new bnds, with terms equivalent t an FSF, in exchange fr existing bnds. Like an FSF, an exchange ffer well in advance f a bnd maturity leaves the issuer with mre ptential leverage t negtiate pricing and terms than likely will be the case if the maturity date f existing bnds is imminent. Will the FSF take ff in Asia? The FSF cncept has gained in ppularity in the US and Eurpean markets. FSF transactins have successfully clsed despite criticism frm sme financial institutins that FSFs dissuade brrwers frm deleveraging, and serve t sweep under the carpet the issue f ver-leveraged brrwers. Critics have als argued that FSFs are generally underpriced, and that t lck in pricing fr, say, three years frm nw cmes with t great an uncertainty. In view f the generally psitive Eurpean experience, it remains t be seen whether FSFs will be utilized beynd Eurpe. In the Asian lan markets, lenders appear t be split dwn the middle as t whether FSFs will becme standard market practice. At the time f writing, we understand that nly ne brrwer in the Asian lan markets (Wesfarmers frm Australia) has entered int frward-start arrangements with its lenders. Cmmentatrs have nted that as the Asian financial markets are less mature than their Eurpean cunterparts, lenders may be less willing t take a lng-term utlk n pricing and market cnditins. It has als been nted that Asian brrwers are skeptical as t why they shuld pay mre n a facility already in place. If the current liquidity crisis evlves int a lnger term prblem, hwever, Asian brrwers may be frced t realize that higher pricing is a small cst t pay fr the certainty f cmmitted funding.
5 FORWARD START FACILITIES 5 Fr further infrmatin abut this client alert, please visit ur website at r cntact ne f the attrneys listed belw. Eurpe Jhn Dewar Phillip Fletcher Patrick Hlmes Thmas Ingenhven Rainer Magld Cathy Marsh Suhrud Mehta Tm Siebens U.S. Daniel Bartfeld Mike Bellucci William Bice Richard Brach Jhn Cbb Warren Cke Edwin Fe Glenn Gerstell Rick Gray Jnathan Green Duglas Harris Edward Kayukv Bill Mahney Jnathan Maizel Allan Marks Peter Nesgs Dara Panahy Elihugh Rbertsn Eric Silverman Blair Tysn Carlina Walther-Meade Karen Wng Asia YJ Kim Anthny Rt Desiree W Gary Wigmre Mark Plenderleith Leigh Schulz David Zemans James Murray Edward Sun Jeffrey Layman
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