Liability Management Exercises: Drop-Down Financings and Uptiering Transactions, What is a Lender to Do?

Description

Liability management exercises have become more commonplace during the past 12 months, and typically take the form of either drop-down financings or uptiering transactions. Both types of transactions involve complex structuring techniques that provide additional avenues of leverage for borrowers but can negatively affect the expectations and rights of existing lenders.

In a typical drop-down structure, the borrower forms and transfers assets to a subsidiary, allowing the subsidiary to incur new debt secured by the contributed assets. This alters the lien position of existing lenders who may have assumed they had first priority claim to assets that have now been transferred to the subsidiary.

In the uptiering transaction structure, the borrower incurs new debt provided by a group of lenders. The existing debt of the participating lenders is exchanged for a pari passu super-priority or second priority position. The result is that nonparticipating lenders are subordinated to two tranches of debt.

Lead and participating lenders should carefully review loan documents to assess borrowers' ability to enter into subsequent liability management transactions. From the lenders' standpoint, the subordination of claims should be a "sacred right," and pro-rata sharing provisions should include transactions that would have the effect of impacting pro-rata sharing.

Listen as our authoritative panel discusses drop-down and uptiering transaction structures and how lenders should respond to these financing maneuvers.