As a professional, it is essential to understand the significance of intercreditor agreements in leveraged acquisition finance transactions. An intercreditor agreement outlines how multiple lenders in a transaction will work together and deal with any potential defaults or bankruptcies.
One specific type of intercreditor agreement is the LMA (Loan Market Association) intercreditor agreement. The LMA is a well-known trade association in the loan market that promotes liquidity, transparency, and efficiency in the market. The LMA intercreditor agreement outlines the rights and obligations of senior and junior lenders in a leveraged acquisition finance transaction.
Leveraged acquisition finance transactions are complex and high-risk. They involve using debt to purchase a company with the expectation that the acquired company`s future cash flows will pay off the debt. These transactions involve multiple lenders, including senior lenders who provide the primary financing and junior lenders who provide additional financing.
The LMA intercreditor agreement establishes the relationship between senior and junior lenders and governs their interaction in the event of default or bankruptcy. The agreement ensures that senior lenders have higher priority rights to the collateral and cash flows of the acquired company. Junior lenders have lower priority rights and accept more significant risks, but they also have the potential for higher returns.
Key provisions of the LMA intercreditor agreement include:
– Waterfall provisions that determine how cash flows will be distributed between senior and junior lenders.
– Standstill provisions that prevent junior lenders from taking action against the borrower or collateral without senior lender consent.
– Subordination provisions that define the priority of payments to different lenders in the event of default or bankruptcy.
– Voting provisions that govern how lenders will vote on key decisions related to the transaction and any potential defaults.
– Transfer provisions that outline the process for lenders to transfer their loans to other parties.
In summary, the LMA intercreditor agreement is a critical document in leveraged acquisition finance transactions. It establishes the relationship between senior and junior lenders and governs their interaction in the event of default or bankruptcy. Lenders who are familiar with the LMA intercreditor agreement can better manage their risks and potential returns in these complex transactions.