The proliferation of funds ready to provide a one-stop shop can cause FOLO structures to lose their place in the market. Questions are posed by both sides: on the one hand, banks are less willing to sit behind credit funds in an execution process, and on the other hand, in a market where restructuring is becoming a more popular means of debt reorganization, direct lenders see a layer of super-senior debt as risking making the process worse for them. without the traditionally high yields associated with FOLO structures. Under the Bankruptcy Code, a subordination agreement is just as enforceable in a bankruptcy as it is outside the bankruptcy. Bankruptcy courts generally treat an AAL as a subordination agreement and enforce it. However, some provisions could violate the basic bankruptcy guidelines, e.B. in terms of classification and voting. An ALA typically determines the lender`s necessary consents to change, modify, or waive the terms of the loan documents. The provisions of the AAL apply in addition to the voting rights requirements in the credit agreement. They are designed to give FO and LO lenders a say in certain changes that run counter to their interests by granting collective voting rights. Voting rules and the level of protection afforded to lenders vary considerably from transaction to transaction and are often heavily negotiated.

In a remedy, FO lenders often have the initial right to exercise secured remedies against creditors, but required OL lenders may exercise secured remedies if the lenders do not exercise such remedies within a certain period of time. Another common approach that generally leads to the same result in the real world is to allow either the required FO lenders or the required OL lenders to initiate the exercise of corrective measures after the expiration of a standstill period. OL lenders are generally subject to a standstill period, often between 60 and 90 days. FO lenders are often, but not always, subject to a standstill period; If this is the case, it is shorter than the closure of the LO lender. If OL lenders decide to take corrective action, FO lenders can take control of the remedies if they act before the expiry of the LO lender`s closure. In a unitranche transaction, the loan agreement contains a single interest rate. Because the AAL spits out debt in pieces with different risk profiles, the AAL adjusts the return payable to FO and LO lenders through authoritarian provisions that redistribute interest payments and sometimes other amounts to be paid by the borrower from FO lenders to LO lenders. The adjusted effective interest rate for each tranche is the same as for a similar transaction of the type that the AAL wants to replicate, usually first or second lien financing. Secured and unsecured creditors have significant rights in the event of bankruptcy.

Unsecured creditors may vote on a plan and oppose the actions taken or not taken in the case. Secured creditors have all the rights of unsecured creditors and more, such as the right to an offer of a loan and to oppose self-government financing secured by privileges that override or on an equal footing with the privileges of that creditor, the use of cash guarantees and the sale of assets. In the aftermath of the financial crisis, the rise of private debt funds, combined with a decline in bank liquidity, meant that banks were no longer the main lenders. FOLO is a derivative of unitranche structures that allow a single tranche of a term loan to combine senior and subordinated debt with a mixed interest rate component. Under a LAA, OL lenders generally waive certain secured creditor rights in favour of FO lenders as long as certain conditions are met or protections are afforded to LO lenders. OL lenders rarely grant a blanket waiver of their secured creditor rights and almost never agree to waive their rights as unsecured creditors. Basically, an AAL divides a single tranche of debt into first-out ("FO") and last-out ("LO") tranches, often with the aim of replicating the economic and other conditions of first/second lien financing. Legal documentation typically consists of a single loan agreement, a single set of security documents, and an AAL. An AAL usually covers the following area. The tranches are prepared under the AAL by dividing the debt into FO debt and LO debt.

FO debt typically includes all revolvers provided under the loan agreement and often includes a certain portion of the term loan drawn at closing, as well as any delayed drawdowns or additional loan obligation held by FO lenders. The LO debt is the debt provided for in the loan agreement, which is not an FO debt. First-out, last-out (FOLO) structures, traditionally a key feature of European SMEs, appear to have seen a gradual decline in some markets – whether due to an inadequate performance profile or an overhaul of the relationship between credit funds and banks relative to their respective market shares. While market commentary quickly pointed to the decline, the folo days may not be over yet. In unit financing, lenders revise the terms of a single tranche of debt through an ancillary agreement called a lender-to-lender agreement or AAL. The underlying tranche can be almost any type of secured debt, including senior or subordinated lien loans or a revolver, or both. Sometimes the triggering event is a default event. Often, trigger events are the same or very similar to cascading trigger events. The following article is an excerpt from a longer article by Neil Cummings, G. Thomas Stromberg and Richard Levin, partners at Jenner & Block LLP. Although the main goal is to create an efficient and streamlined process, some features should be noted: Read a related article in the International Financial Law Review by clicking here. Neil Cummings is a partner in the Corporate division of Jenner & Block and a member of the Corporate Finance practice.

It focuses mainly on domestic and cross-border financing operations. G. Thomas Stromberg is a partner in the transactions department of Jenner & Block and a member of the Corporate Mergers and Acquisitions group. He focuses his activities on the representation of managed money invested in the acquisition and financing of private companies. Richard Levin is a member of Jenner & Block`s bankruptcy, reorganization and corporate reorganization practice. As the author of the 1978 U.S. Bankruptcy Code, he is an internationally recognized leader in complex bankruptcies, transactions, and special situations. They are accessible to ncummings@jenner.com, tstromberg@jenner.com and rlevin@jenner.com. As the COVID-19 outbreak leads to increased and faster use of working capital lines, traditional FOLO players are rethinking their risk strategies. Increasing competition between private debt funds and banks has led to new debates in an already problematic dynamic. From the borrower`s perspective, FOLO means simplified trading processes, reduced execution risk and security due to the lack of flexible terms (as for syndicated financing), but market participants have expressed some concerns that call into question the future of FOLO: LO lenders with redemption rights usually have an initial offer or a right of pre-emption to buy loans or bonds, to be sold by an FO lender to a third party.

Some stores require that loans or bonds first be offered to other FO lenders before being offered to lenders. There may be a reciprocal right of first offer or a right of first refusal in favour of FO lenders. However, not everything is dark for HFOs across Europe. Some jurisdictions, such as Germany and Belgium, have been able to continue to offer lower prices and thus benefit from the benefits of FOLO without being undercompensated for their risk. It remains to be seen whether there will be a return to this style of low-risk lending in a post-COVID-19 environment. Unless there is a cascading triggering event, FO and LO bonds are usually paid pari passu. If there is a cascading trigger event, all guarantee products and payments made by the borrower in accordance with the AAL payment cascade will be applied. During a cascading trigger event, FO bonds (which are often subject to a cap) are usually paid in full before the amounts are applied to OL bonds.

Common triggers for the AAL cascade include an event of payment, bankruptcy or default of a financial clause, or a notice of recourse exercise by FO lenders. If a triggering event continues, LO lenders with a certain portion of the OL tranche are generally entitled to acquire FO bonds, usually at face value and often plus certain prepayment premiums. For some trades, the redemption trigger is any default event, but it is usually tighter. Common triggering events are an acceleration or a payment or bankruptcy event or a violation of a maximum FO leverage ratio. Some LO lenders want to be able to exercise the right of redemption when a payment cascade trigger is effective. .