United States: Themes Of Change: Key Themes Underlying The September 2012 Changes To The LMA Intercreditor Agreement And Implications For Mezzanine Creditors

As the mezzanine market continues to mature, mezzanine creditors have been seeking enhanced protections in their contractual relationship with senior creditors. The themes behind last month's revisions to the Loan Market Association (LMA) recommended form of intercreditor agreement for leveraged acquisition finance reflect an attempt to take into account recent changes in market practice and feedback from market practitioners.

According to the LMA, the September revisions to the intercreditor agreement are grouped into four broad themes and are the product of the LMA's first wide ranging review process since the initial publication of the agreement in 2009. From a mezzanine perspective, these revisions address some key requests from mezzanine creditors who have been unsatisfied with what they perceive to be senior creditor friendly provisions in the 2009 agreement and its 2010 update.

Facilitation of Enforcement

Not surprisingly, one of the main themes underlying the September revisions concerns the facilitation of enforcement by way of sale of the business and the release of claims. For example, the new intercreditor agreement includes revised enforcement provisions, which have been supplemented for enforcements by way of appropriation or enforcement sale of shares.

While the general theme relates to the facilitation of a senior-led enforcement by the senior creditors, the LMA has recognised that the interests of all parties need to be addressed to avoid uncertainty, recurrent litigation and associated destruction of value for all stakeholders.

Proof of value consideration on enforcement

To this end, the revisions take into account the clear push by mezzanine creditors for more involvement in enforcement processes and objective valuation procedures, particularly following the high-profile cases on valuation in the last few years.

Senior creditors tend to push back requests by the mezzanine creditors to participate in the enforcement process. In the interests of controlling the enforcement strategy, senior creditors are reluctant to involve the mezzanine creditors in any decisions regarding the appointment of a valuer or the marketing of the business sale on the basis that this could have a material, negative impact on the timing and price of the sale. On the other hand, if the security agent has to rely on uncertain language to determine its responsibilities in an enforcement scenario, that would clearly be disruptive to all creditor classes and certainly impede a smooth enforcement process.

In response to these issues, rather than merely providing that the security agent has a duty to use reasonable care to obtain a fair market price, the new intercreditor agreement includes an option to the security agent to obtain a fair market value on an enforcement disposal. Also included is a new optional provision which details processes that are deemed to satisfy the fair market value requirement. Such processes include the delivery to the security agent of a fair value opinion from an independent financial adviser, and a disposal made pursuant to an auction or other competitive sales process.

Whereas mezzanine creditors welcome these revisions, which in part satisfy their key requests, it is not hard to imagine where the next areas of tension with respect to mezzanine creditor concerns might be focused. Having achieved the upgrade of certain desired market practices to the status of "LMA recommended practice", the mezzanine creditors will now watch to see how these revisions pave the way to the next phase of scrutiny, direction and/or litigation. It is already clear, for example, that the term "competitive sales process" is open to interpretation - mezzanine creditors will be seeking to clarify the meaning of this term. In recent senior/mezzanine transactions, senior creditors have demonstrated a move towards accepting the addition of parameters around the definition of "competitive sales process", for example, they have been willing to qualify the definition with language restricting them from participating in the first round of the auction. The requirement of a fair market value opinion also immediately prompts certain questions, such as who will bear the cost of the opinion and who will provide the opinion. It is also not clear if the mezzanine creditors will have access to, or reliance upon, this opinion. Moreover, the new intercreditor agreement does not provide any guidelines as to timing for obtaining the opinion and the caps on the liabilities of any advisers providing the opinion.

Interestingly, the new intercreditor agreement does not provide any optionality with respect to the ability of the mezzanine to be consulted prior to enforcement even though we have seen mezzanine creditors successfully negotiating for the ability to be consulted over a reasonable period.

Non-cash consideration

The theme of facilitating enforcement prevails in the LMA's treatment of non-cash consideration in the new intercreditor agreement. Payment of non-cash consideration and its treatment under the terms of the intercreditor agreement were not addressed in the 2009 LMA intercreditor agreement. Until these revisions, the security agent, faced with a request to accept non-cash consideration for disposals of assets in an enforcement scenario, was unlikely to agree without a satisfactory indemnity or near unanimous consent from senior lenders. Instead, the new intercreditor agreement now includes a provision that expressly enables the security agent to receive non-cash consideration.

The mezzanine creditors are afforded some level of protection by the proviso that the value of any non-cash consideration (and the discharge of liabilities resulting from a distribution of non-cash consideration to creditors) must now be determined by an independent financial adviser, but choice of this adviser is within the control of the senior creditors. The senior creditors also control the instruction of the security agent to accept non-cash consideration and the decision as to whether to realise it for cash prior to distribution to creditors. The mezzanine creditors are in effect excluded from key decisions relating to matters involving non-cash consideration.

From an agent's perspective, there is a lack of clarity as to how the Senior Agent is authorised to apply non-cash recoveries in discharge of the underlying debt obligations if faced with lenders unwilling or unable to accept non-cash proceeds and how the provisions relating to non-cash consideration dovetail with certain other provisions, including those on loss-sharing.


One important issue for mezzanine lenders has been the ability of the borrower, in some cases, to incur a large amount of debt ranking in priority to the mezzanine debt as a result of the concept of senior headroom. Mezzanine creditors have been pushing to reduce senior headroom by the amount of senior payments and deferrals of amortisation. The majority of these deductions are now settled market practice.

With respect to generating more debt, a framework designed to facilitate a refinancing of the senior facilities in full without the need to amend the intercreditor agreement or gain mezzanine consent has been introduced into the new intercreditor agreement, with the new facilities having to meet certain criteria relating to size, tenor and other terms. The new further assurance clause with respect to the release of transaction security by the security agent will need to be considered on a transaction specific basis. Certainly the release and provision of security must not have a material effect on any of the secured parties.

The senior headroom now operates slightly differently. It includes an option that is to be used in circumstances where the commercial agreement is that the senior facilities, where there are amortisations, may only be increased from their reduced level just before the refinancing in an amount equal to the senior headroom. It also allows a cap to the yield, although it is worth remembering that the senior creditors, in the context of primary syndication of the senior facilities, still retain the ability to increase the margin, fees or commission pursuant to senior flex rights. In this respect, mezzanine creditors are advised to seek disclosure of any flex terms prior to signing.

Creditor Controls

The second theme running through the latest revisions to the intercreditor agreement relates to creditor controls.

Permitted Payments

In the revised intercreditor agreement, payments by obligors to a hedge counterparty arising as a result of termination following a bankruptcy event or force majeure event are permitted if there is no senior default/event of default. In addition, automatic early termination in hedging agreements is permitted in certain circumstances as are payments arising as a result of automatic early termination if there is no senior default/event of default.

Mezzanine Lenders' adviser costs

The issue of payment of mezzanine creditors' legal fees in the context of receiving advice when a restructuring is imminent has been the subject of much debate. A new provision has been added to allow for mezzanine creditors to be paid certain restructuring expenses (subject to a cap) provided no senior payment default has occurred. These restructuring expenses relate to the fees, costs and expenses of the mezzanine agent and of any advisers in respect of restructuring advice or valuations relating to the group. However, there is an option to carve out those incurred in connection with the dispute of any aspect of certain disposals of assets or sales of liabilities in distressed circumstances and in connection with any provision of the debt documents (the intercreditor agreement, the security documents and the senior and mezzanine finance agreements, among others). The revisions reflect the move towards permitting the mezzanine creditors to recoup reasonable expenses absent litigation.

In addition, the definition of "Mezzanine Creditor" now includes the mezzanine agent. This means that the mezzanine agent's fees are considered as part of the mezzanine liabilities and are ranked pursuant to the provisions on ranking and priority.

Security Agency

Another group of changes relate to the security agent and the general theme is accommodating the security agent's evolving role, with some security agents having to exercise an increasing degree of commercial judgement and discretion. The LMA has revised the intercreditor agreement so that the security agent is afforded additional protections in light of this. New protections include: the right to charge for management time; an enhanced right to rely on certificates; the express right to engage independent legal counsel and to engage counsel/experts/professional advisers; and enhanced and more explicit liability exclusions. The revisions take into account the fact that the exercise of the security agent's powers and judgement often have a commercial impact on the secured creditors and are not merely contractual and administrative. This is particularly the case with respect to valuations, for example. As a result, the trend has been for the security agent to become increasingly involved in intercreditor agreement disputes, as seen in a number of recent high-profile debt restructurings. The security agent has often found itself in a position where it has to exercise its commercial judgement in order to carry out its contractual duties. Whereas in the past the existence of a conflict with the interests of the mezzanine creditors would not necessarily prevent it from carrying out seemingly valid instructions which were nevertheless open to some interpretation, it could be that we begin to see a new dynamic, with the security agent engaging independent counsel merely if it reasonably "deems this to be desirable". Furthermore, it will not be liable for relying on this advice.

Smaller Drafting Changes

Lastly, there are a group of revisions that are simply smaller drafting changes that accommodate the other changes and make the intercreditor agreement easier to follow.


The revisions are to be welcomed by the mezzanine creditors on the whole, but some of their key requests have been incorporated into the new intercreditor agreement only in part or as an option rather than a recommended position. The latest revisions by no means provide a settled intercreditor agreement position, with key issues still very much amenable to further negotiation. While legal advisers for the mezzanine creditors continue to seek further protections and concessions, the underlying themes to the latest changes to the intercreditor agreement will no doubt continue to run through each stage of its future evolution.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.