Bankruptcy Implications of Affiliated Lender Provisions and Debt Buybacks - Unenforceability of Bankruptcy Voting Proxies Expose Flaws in “Market Standard” Provisions

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Over the last few years, provisions in credit agreements permitting the Borrower’s equity sponsor and other affiliates (typically referred to as “Affiliated Lenders”), to purchase term loans made thereunder and allowing the Borrower to “repurchase” such term loans on a non-pro rata basis, have become common. However, many of the provisions governing such purchases that have become “market standard” do not adequately protect the non-Affiliated Lenders’ interests in a bankruptcy of the Borrower. This note explores such provisions, how they fail to protect non-Affiliated Lenders and how they could be properly drafted in order to address non-Affiliated Lenders’ concerns.

I. Affiliated Lenders -

The standard provision that permits Affiliated Lenders3 to purchase term loans permit such purchases so long as (i) the number of Affiliated Lenders is limited (usually to two or three Affiliated Lenders), (ii) at the time of the purchase, the Affiliated Lenders, in the aggregate, will not own more than 20 - 25% of the term loans, (iii) each Affiliated Lender agrees to vote under the credit agreement (or is deemed to vote under the credit agreement) in the same manner as the non-Affiliated Lenders on a pro rata basis (except for certain sacred rights, which vary among credit agreements), (iv) each Affiliated Lender provides to the Administrative Agent a proxy allowing the Administrative Agent to vote its claim in a bankruptcy and (v) the Affiliated Lenders agree that they can be excluded from “lender only” information and meetings. In some agreements, an Affiliated Lender must also represent that it has no material non-public information regarding the Borrower at the time of purchase.

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