Deleveraging Through The LMA Intercreditor Distressed Disposal: How To Navigate A Challenge-Free Process

• Published date: 01 May 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring
• Law Firm: Katten Muchin Rosenman LLP
• Author: Sonya Van de Graaff, Prav Reddy, Mark Johnson, Dominique Hodgson and Dodie James

Executive Summary

A distressed disposal (Distressed Disposal) under an LMA-based intercreditor agreement¹ (ICA) is a powerful restructuring tool. It has the potential to significantly de-lever a business for the benefit of the "in the money" class of lenders (which, for ease of terminology, we will refer to as the "Senior Lenders").

Yet, unlike similar tools (such as company voluntary arrangements (CVAs), schemes of arrangement and restructuring plans), it receives little press attention. This is for two reasons, each of which should make the process even more appealing for Senior Lenders. The first is that it is a contractual right, requiring no court involvement or recourse to statutory tools. The second is that, based on the limited case law on the process, it has rarely been challenged.

We would expect, however, that with the economic tide turning, the process may well be put to the test more regularly and produce a greater body of case law considering the issues.²

This article suggests some tips for best practices to facilitate a challenge-free process. For ease, the discussion assumes the following:

• that the security package permits a single point of enforcement by way of an English share pledge in respect of an entity that holds the operating companies (which, together, we will refer to as the "Target Group"); and
• that value breaks in the Senior Lenders' debt.

ICAs and Distressed Disposals - A Brief Introduction

For those unfamiliar with Distressed Disposals and ICAs, below is a brief introduction.

Deleveraging Tool: At its heart, a Distressed Disposal is a deleveraging tool. Senior Lenders may invoke it following an enforcement event to effect a transfer of the Target Group to a newly incorporated entity affiliated to the Senior Lenders. Crucially, the ICA permits release of the Target Group from all liabilities and security - similar in effect to a so-called "pre-pack administration."

Other creditors of the seller entity (including the mezzanine lenders and intra-group lenders (which, together, we will refer to as the "Junior Lenders")) will be left with recourse to the seller's proceeds of sale (and any other assets that the seller might have following the transfer of the Target Group). These are likely to be nominal, leaving the seller with no option but to file for administration.

Parties to an ICA: An ICA governs the relationship amongst the various classes of principal financial creditors to a corporate group (e.g., the Senior Lenders and Junior Lenders). It regulates not only their contractual rights amongst one another, but also their respective entitlements to common security (including the right to enforce and receive distribution of proceeds following enforcement).

The Senior Lenders and...