Hence, last dollar outstanding in a junior RMBS has more than the average risk. This risk can be mitigated by structural features, such as market value overcollateralization triggers, which give credit for deleveraging in the later part of the transaction. The super senior lender would then be left in the structure alongside only third party term debt that is not bound by the intercreditor. The viability of such a series of events in most structures is questionable but it is at least worth considering at the point of https://personal-accounting.org/senior-debt-covenants/ negotiating the intercreditor terms. We are seeing many examples of first out/last out deals in the market, ie where it is agreed in the ICA that a portion of the term loan (often provided by the bank who is providing the working capital facility) ranks ‘super senior’ alongside the working capital facility. I expect that what we will see is that the new document will also be used as the starting point for those types of structures, with the necessary adjustments being made by the law firms advising on those deals.

S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

• The spread widening is measured by the change in weighted-average spread of the portfolio.
• It provides better protection than a pure loss trigger as it takes into account a possible increase in future losses implied by the ratings migration.
• A federal oversight board was also implemented to manage Puerto Rico’s finances.
• For this reason, senior debt holders typically want to keep other debt at a minimum.
• As a result, certain business units of S&P may have information that is not available to other S&P business units.

Those models said that if you take on this risk and sell that risk, you’re fully hedged. The investors who bought the higher-risk tranches of the synthetic CDOs have been wiped out — the banks, essentially, have taken nearly all their money. If the CDS contracts hadn’t worked (if, for example, the government decided “to simply annul the credit default swaps as void”, as Ben Stein has proposed), then the banks would have lost even more. But rather than just sell the CLO outright, the bank would most likely split it up into tranches. If the companies in question were all investment grade, you could be sure that at least 80 of them would still be making interest payments at any one time.

Loan Market Association’s ‘super senior/senior ICA’ – a new standard?

The underlying credit, the particular positions of the super senior and unitranche lenders, and evolutions in market practice, will all affect specific points that may seem less critical at the time but can have significant effects down the line. Senior lenders are those who are in the best position if a company gets into difficulties with its debt as the senior lenders have first call on the unsecured assets (before other lenders). However, in a debt restructuring, sometimes new lenders come in to fund the continuing operation of the company on a super-senior basis. This means that the senior debt becomes subordinated to the new super-senior debt. Secured senior debt is backed by an asset that was pledged as collateral. For example, lenders may place liens against equipment, vehicles or homes when issuing loans.

• The companies all value their relationship with the bank, and the bank values its relationship with the companies.
• They would take a bunch of subprime-backed CDOs, and treat the interest payments from the CDOs much as they treated the interest payments from corporations.
• S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.
• Conversely, we also see precedent documentation that effectively negates the super senior lender’s ability to drawstop by allowing the unitranche provider a right to waive / consent to the remedy of any Event of Default for all purposes.

Asset-backed securities are financial securities collateralized by a pool of assets, including loans, leases, credit card debt, royalties, or receivables. Tranches are portions of debt or securities that have been designed to divide risk or group characteristics so that they can be marketable to different investors. The dealer’s correlation desk is seeking to buy protection on a hypothetical super senior portion of a reference portfolio. The investors, such as hedge funds or conduits, are willing to sell protection but they have limited capital and are seeking higher returns than those provided by the plain vanilla super senior tranche. Hence, these investors sell protection on a leveraged basis in the form of leveraged super senior notes.

Senior Debt: What It Is, Why It’s Less Risky

Leveraged super senior transactions provide protection on a super senior tranche. The structures are often characterized by attachment points that significantly exceed the level of losses consistent with an AAA rating. The risk that portfolio credit losses will exceed the attachment points is therefore remote for a super senior tranche. Owing to their low credit risk, super senior tranches offer potential protection sellers a low risk premium when considered on an unleveraged basis. Furthermore, super senior notional–as a percentage of collateralized debt obligation liabilities–is quite large.

The Super Senior Intercreditor Agreement

If the company files for bankruptcy, it must liquidate all of its assets to repay the debt. If the company’s assets are liquidated for $1.25 million, it must first pay off the $1 million amount of its senior debt A. Only half of the remaining subordinated debt B is repaid due to the lack of funds. With subordinated debt, there is a risk that a company cannot pay back its subordinated or junior debt if it uses what money it does have during liquidation to pay senior debt holders. Therefore, it is often more advantageous for a lender to own a claim on a company’s senior debt than on subordinated debt.

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Court-supervised restructuring tool introduced in June 2020 as an extension of the existing scheme of arrangement under the Companies Act 2006. The restructuring plan can be used to “bind” a minority of creditors into a restructuring and to “cram down” a dissenting class of creditor, meaning that a court forces them to accept changes to the terms of a loan. For example, if the court accepts an independent valuation that shows that the value “breaks in”, that is, only covers part of, the super senior creditor class, the senior creditors may be obliged to accept the proposed restructuring plan. In reality, it is too early to say how “super” the LMA Super Senior Documents are. The structure is still relatively new, so it seems certain that practices and documents will evolve further. However, anything which can present a documentary starting point will save time and money for all concerned.

The temptation is therefore to take as agreed the intercreditor position from a previous deal – whether or not involving the same super senior lender / unitranche lender combination. High-profile cases of senior debtholders being unexpectedly “primed” have risen in recent years. Priming occurs when one lender surpasses the priority status of another with the introduction of new debt that effectively becomes super senior.

Understanding the tax disclosure in a fund Private Placement Memorandum (PPM)

Osborne Clarke is a full-service, sector-focussed, international law firm. Our leveraged finance and private equity teams are amongst the most experienced and active across the breadth of the UK mid-market. For further details of our capabilities and experience, to discuss any of the issues raised in this update, or to explore how our team might be able to help you, please contact Laurie, Max or your usual Osborne Clarke contact. This is a particular challenge, as such risk often amounts to event risk. Our recovery ratings generally do not factor in priming risk for senior debt, as we view it as too unpredictable and, generally, remote.