Combining Asset-Based and Term Lending Facilities: Navigating Competing Interests, Harmonizing Documentation

Description

It is common when there is an ABL facility and a term loan facility to have a "split-collateral" structure with each having a first lien position on different categories of assets and second liens on the asset categories subject to the first lien of the other. The different priorities and exit strategies between the ABL and the leverage loan will lead to certain approaches both in their respective loan documents and the intercreditor agreement.

The ABL facility is underwritten based on recovery from the value of the assets of the borrower (inventory or receivables, for example) and with a focus on the real time liquidity of the borrower arising from its borrowing base. The term lender is less concerned with the value of particular assets and more focused on the borrower's business as a whole and its historical cash flow, so that it can be refinanced, restructured, or sold.

The solutions to the issues that arise in the intercreditor agreement will be driven by the different principles underlying each type of credit facility. It will establish the priorities of each lender's security interest and provide the guidelines for enforcement rights and other rights in the event of the borrower’s distress (including standstill provisions and bankruptcy matters).

Borrowers often request that the ABL documents be drafted to conform with the borrower's term loan documents. This presents issues for ABL lenders who rely on metrics and liquidity protections that may not be contained in a term loan agreement, but may in some respects provide more flexibility to a borrower. While there are many points of overlap, the underlying basis for the underwriting of each type of debt product necessarily leads to some divergence in the handling of covenants and permitted transactions that need to be understood by all of the parties and ultimately captured in the documentation of the two credit facilities.

Listen as our authoritative panel discusses the issues presented for ABL and term lenders when providing credit facilities to the same borrower and how best to document these split collateral financings.