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Mezzanine Subordination Agreement

The inclusion of a right of redemption for the mezzanine lender to acquire priority debt as a common denominator is increasingly common in intermediate transactions. Prima facie, a right of redemption seems to be a win-win situation for all parties; with the senior lender able to end the troubled transaction on an equal footing, and the mezzanine lender (which has a higher risk profile) able to assume responsibility for its own fate on the deal. The following, from the perspective of a primary lender, are some of the most frequent concessions required by a mezzanine lender. Note that payments made by investors to the mezzanine lender are generally only allowed after the full repayment of the priority debt. Although, in some cases, where the borrower and the mezzanine lender have been the subject of a planned principal payment agreement, some priority lenders assign them, unless there is a default under the terms of the senior financing agreements (or under other conditions). Companies will turn to mezzanine financing to finance growth projects or to assist in short- and medium-term acquisitions. Often, these loans are provided by long-term investors and existing funders of the company`s capital. In the case of mezzanine credit structuring, a number of other features are common, such as. B: When negotiating an inter-celement file, high-level lenders should bear in mind that there is no “market standard” or “market principles” in Australia that impose how a high-level lender must negotiate the interbank deed.

Ultimately, the mezzanine lender`s trading position, which will depend on many factors, including its role in the possibility of the transaction and its association with the borrower or sponsors, will drive negotiations and concessions (if they exist) will be accepted by a high-level lender. The end result is a contingent of deals and the involvement of an experienced legal advisor is therefore essential to ensure an appropriate outcome for the main lender. For mezzanine lenders, they risk losing their investments in the event of bankruptcy. In other words, when a company withdraws from the business, priority debtors are first paid by the liquidation of the company`s assets. If, after the repayment of the priority debt, there are no assets, the lenders will lose in the mezzanine. For example, XYZ Bank is offering ABC, a manufacturer of surgical equipment, $15 million in mezzanine financing. Financing replaced a $10 million higher line of credit with more favourable terms. ABC received more working capital to bring additional products to market and paid higher interest debt.

XYZ Bank will be able to collect 10% interest payments each year and be converted into a shareholding in the event of the company`s default. To avoid being suspended indefinitely, the mezzanine lender may attempt to include a status quo in the intercreditation file. Under such an agreement, the mezzanine lender may inform the primary lender of its intention to accelerate its debt or take other enforcement action. If the priority lender does not take enforcement action after the expiry of a certain “status quo period” (which may be a delay of 90, 120, 150 or 180 days, or even a combination that varies depending on the type of delay) and the standard is in default, the mezzanine lender is allowed to take enforcement action. An overview of the main conditions and provisions of intercrediter/subordination agreements that govern the relationship between a priority guaranteed lender (the Senior Lender) and a mezzanine lender (Mezz Lender) is available for download. As a general rule, the obligations of the lender Mezz (mezz bonds) are unsecured or exclusively guaranteed by a collateral of the interests in the borrower and/or by a second right of bet on the security of the senior Lender (often called “second” collateral in connection with the payment settlement applicable to mezz bonds).