Standstill periods in private credit intercreditor agreements don't get much attention – they exist to allow senior lenders time to take enforcement action before super senior lenders can step in. But if you're not careful, they risk grinding a distressed scenario to a halt, and you might only notice once it's too late.
Private credit has evolved rapidly over the past decade and now makes up a material part of the European leveraged debt market. Much of the development over that time, from a documentary perspective, was relatively ad-hoc and suited to fit the bespoke structures and fact patterns that had historically been the sweet spot for direct lenders. However, as private credit has burst into the mainstream, some of the terms that developed from those humble beginnings have failed to evolve. This article explores an example in the context of intercreditor standstill periods.
In a typical senior/super senior structure, senior lenders will initially control an acceleration/security enforcement process following an event of default. However, after a "standstill" period, normally lasting between 90 and 150 days (depending on the nature of the default), super senior lenders will be permitted to take control of any enforcement (assuming that the senior lenders haven't started to enforce). This gives super senior lenders comfort that they can't become stuck in a distressed situation because senior lenders are sitting on their hands. This period will start from the date that super senior lenders give notice of certain specified events of default (often defined as "material events of default" or similar).
This structure works where both classes of lenders benefit from substantially the same covenant package, albeit with super senior lenders customarily having more covenant headroom. However, cov-lite deals with no maintenance covenants benefiting the senior lenders are now relatively common in private credit deals and some well-used intercreditors have started to show their limitations. This can result in senior lenders being stuck in an uncomfortable position where, following a super senior financial covenant breach, the senior lenders have no corresponding actionable default. If the standstill period expires while the default remains outstanding, super senior lenders will be permitted to accelerate and control the security enforcement process, while the senior lenders (who at this stage will typically have the benefit of a cross-acceleration event of default) have no mechanism to re-take control of proceedings, even after they have accelerated the senior debt.
We have reviewed recent English law intercreditor agreements across different market segments, and this weakness appears in a significant number of documents but often goes unnoticed. Special circumstances aside, this is unlikely to reflect the intention of the parties. So, how can it be addressed?
The Mid-Market approach
The standstill period begins once super senior lenders deliver a notice (often called a "Super Senior Enforcement Notice") to the security agent identifying the relevant super senior material event of default that is continuing. In many deals in the mid-market, the delivery of a Super Senior Enforcement Notice itself will constitute a cross-default for the benefit of the senior lenders, allowing them to accelerate the senior debt during the standstill period and, most importantly, to have the opportunity to drive an enforcement/acceleration process, rather than being locked out in favour of the super senior lenders.
Super Senior lenders are in no worse position as they can still control the enforcement process at the end of the standstill period (assuming the senior lenders haven't already initiated proceedings). Senior lenders, however, are no longer shut out from driving an enforcement process should they accelerate the senior debt. Although this effectively brings forward the point at which the senior lenders can accelerate, the super senior lenders must have already shown a willingness to accelerate by delivering the Super Senior Enforcement Notice which would in any event put the borrower in a stressed situation.
The High Yield approach
High yield transactions often include a super senior revolving facility and so it would be reasonable to expect this point to be approached in a similar way in the private credit space. However, the European high yield and private credit markets have developed in different ways.
In general terms, intercreditor agreements will prohibit super senior lenders from taking any "Enforcement Action" prior to the end of the standstill period. However, in most European high yield intercreditors, this restriction is limited to directing the enforcement of the transaction security, not accelerating the relevant debt. This means that, following an event of default ("material" or otherwise), super senior lenders can accelerate their debt at any time and the standstill will only apply to instructing any enforcement action. With this approach, senior lenders would immediately benefit from a cross-acceleration event of default at the outset of the standstill period (with a similar result to the mid-market approach) and be permitted to control any enforcement process
This approach is consistent with the general approach in New York law high yield deals, where super senior lenders would typically only be restricted from enforcing security, but not from taking acceleration action.
Although we do see this approach in some non-high yield deals (including in private credit), it is very much dependant on the precedent line being used for a given transaction.
A third approach
There is a potential sensitivity with both of the approaches set out above – they allow senior lenders to accelerate the senior debt at the start of the standstill period, and so could be seen as indirectly giving senior lenders the benefit of a financial covenant.
There is, however, an alternate approach that avoids this concern. The intercreditor standstill provisions can be amended to, at the time the super senior lenders accelerate (resulting in a cross-acceleration into the senior debt), deem senior lenders to have accelerated the senior debt immediately prior to the expiry of the standstill period, which would allow senior lenders to control enforcement in the normal way. Super senior lenders would still be able to retake control of an enforcement process if there has been no repayment of the super senior liabilities at the end of the discharge period (typically 180 days from delivery of the Super Senior Enforcement Notice). This would effectively put super senior lenders in the same position as with any other event of default that benefits both the senior and super senior lenders. And from a borrower perspective, there should also be no perception that the point at which senior lenders can accelerate has been moved forward
Each of these approaches tackles the problem in a different way, but ultimately has the same result - senior lenders do not run the risk of being locked out of controlling an enforcement process.
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