Co-authored by Milko Pavlov, Director, Houlihan Lokey
Most contractual remedies available to Junior Creditors appear reactive in nature, in that they rely on the ability to take action, as permitted by the terms of the relevant credit documents. However, depending on the position of the Junior Creditors and the facts and circumstances of the case, minority Junior Creditors may still be able to act in a proactive manner.
There can of course also be a range of complicating factors either embodied in the credit documents or which are a feature of the restructuring market itself that can dilute the strength of contractual remedies available to these stakeholders. These are also discussed briefly below
Amendments to Credit Documents
Credit documents almost always allow covenants and other provisions to be amended, subject to certain creditor consent thresholds being achieved.
Typically, all substantial amendments and waivers under the relevant agreement will require the consent of a majority (typically either more than 50% or 66 2/3%) of the Junior Creditors, except for certain specifically listed amendments and waivers which may require the consent of a supermajority (typically either more than 80% or 90%) or the consent of each lender. At the top end of the spectrum are amendments to the 'money terms' of the debt, such as modifying the principal amount of the debt, extending maturity or changing the currency of the loan. Often these money terms cannot be amended or waived without the consent of all creditors, because they are considered fundamental to the rights of creditors against the debtor.
Where large lending syndicates are involved, obtaining the consent of all lenders can be impractical or even impossible. The flipside is that the requirement for unanimous consent can give leverage to Junior Creditors. There may also be provisions in the credit documents (such as 'structural adjustment' or 'facility change') which allow certain key changes to be made with the consent of all those affected by the modification (sometimes in addition to an overall majority of creditors). This lower consent threshold would likewise permit the debtor group to work with cooperative or proactive Junior Creditors to make amendments.
In addition, the minority Junior Creditors should check the existence of two other key provisions which could affect their and other creditors' rights against the debtor. The first is "replacement of lender" or so-called "yank the...