22 IFLR/September 2013 www.iflr.com
LEVERAGED FINANCE QUARTERLY
What is it?
Labelled ‘first out’ in the US and ‘super
senior’ in Europe, this is a revolving credit
facility (RCF) which has priority over other
pari passu debt in relation to the proceeds of
enforcement of collateral and, in the US,
guarantee recoveries.
First out facilities in the US are relatively
uncommon and appear most often in middle-
market financings and restructurings. The
terms of first out facilities are often deal
specific. By contrast, super seniors are a well
known component of a leveraged capital
structure in the European market, and the
terms are more settled.
How does it work?
Super seniors typically appear beside pari
passu senior secured bonds. First out facilities,
on the other hand, commonly co-exist with
pari passu term loans and/or pari passu senior
secured bonds.
The primary feature of super senior or first
out facilities across both markets is waterfall
priority. That is, priority with respect to the
application of proceeds of collateral following
an enforcement of collateral and, in the US,
guarantee recoveries. The super senior or first
out tranche is paid from the enforcement
proceeds (including, in the case of first out
facilities, enforcement recoveries in a Chapter
11 bankruptcy process) before other pari
passu debt tranches that are secured by the
same collateral.
A standard super senior or first out
waterfall provision provides that:
• the obligations under the super senior or
first out facility have top payment priority
(except for payment of certain
enforcement-related and other amounts
owing to agents of the pari passu creditors
in their capacities as such); and,
• following payment in full of the super
senior or first out obligations (and the
enforcement-related and agent
obligations, if any), any remaining
proceeds are allocated to the other pari
passu obligations.
Depending on the context, a first out
facility may be documented in the same or a
separate facility agreement, whereas super
seniors typically appear in their own
standalone agreement. Waterfall priority and
associated provisions are documented either
in an intercreditor agreement (in bank/bond
structures, and where the first out/super
senior is documented in a separate
agreement) or a combined facility agreement.
Importantly (especially for a US
bankruptcy analysis), first out/super senior
facilities do not have their own first priority
lien, which a first lien lender would have in a
first/second lien structure. Instead, all pari
passu creditors share the same grant of
collateral (and guarantees) with the result that
in Chapter 11 proceedings first outs would
typically vote in the same class as the senior
secured lenders.
Most first out facilities include simple
turnover provisions with respect to proceeds
received in contravention of the waterfall
provision, while others include highly
negotiated and bespoke intercreditor terms.
Super seniors do not benefit from
subordination provisions, although they do
benefit from turnover provisions which
capture certain recoveries, typically with
respect to collateral.
First out facilities should recover in priority
to other senior secured debt in Chapter 11
proceedings. Super seniors, on the other
hand, would not automatically take priority
over other pari passu debt in a bankruptcy
process in Europe. Instead, they are
structured on the premise that in a default
scenario there will be an enforcement of a
single share pledge which captures the entire
value of the group as a going concern, and
thereby enables a lender-driven financial pre-
pack outside of formal bankruptcy
proceedings.
Control over enforcement
A key issue for structures involving first out
and super senior facilities is who controls
enforcement actions. A balance must be
struck between the interests of a relatively
small and well-insulated first out/super
priority class of revolving lenders, and the
interests of the larger and more exposed class
of term loan lenders or bond investors.
First out position – US
First out facilities have generally provided that
enforcement actions, whether pre-bankruptcy
or during an insolvency or bankruptcy
proceeding, are controlled by lenders holding
a majority of all senior secured obligations
(that is, not the first out obligations).
However, as evidenced by certain recent
US transactions, this default position in
favour of the larger senior secured creditors
has been increasingly circumscribed. First
out lenders are becoming more focused on
limiting dilatory enforcement by the term
loan lenders or bond investors holding a
majority of all senior secured obligations.
A few first out transactions in recent years
have even flipped the traditional priority of
creditors by providing the first out revolving
tranche with exclusive control of enforcement
actions, while the holders of term loans or
bonds were left in the more junior position of
having to accept a more passive role.
A compromise is to include a short
enforcement standstill period (for example,
90 to 120 days) following the expiration of
which, if the term debt holders are not
exercising remedies, the first out revolving
lenders are able to step into direct remedial
action.
First out or super
seniors – same
difference?
The similarities and distinctions between typical
features of first out revolving credit facilities in the US,
and super senior revolving credit facilities in Europe
Leveraged finance quarterly
In this quarterly feature, Milbank’s leveraged
finance group distil, compare and contrast
key features of the US and European
leveraged finance markets.
It will shine a light on the legal blindspots that
have arisen as markets and products
converge, and as companies increasingly look
to structure transatlantic deals.
Contributions from partners on both sides of
the Atlantic will look at loans and bonds, with
large-cap or big sponsor-backed LBO
documentation in mind.
The next contribution, which will focus on
intercreditor agreements, will appear in the
December/January edition of IFLR magazine.