Thread by @SkolCapital

You’ve voted! Now relax and enjoy another mezz thread!

Today’s topic is intercreditor agreements (You’ll understand the pic later)...

A few years ago, a small local PE shop calls. They had previously bought a small building products company and financed part of the deal with an out of state mezz group.

The company was trying to roll-out beyond their historical base, but things weren’t going well.

The mezz group was trying to run the old “lend to own” play...

So I stepped in, and negotiated a deal to take the mezz group out. Thinks were progressing nicely until we negotiated the intercreditor agreement...

See, under the UCC code there is actually no concept of 1st lien or 2nd lien. Priority is all based on contracts.

If no contract exists, then it’s all based on timing (first come, first serve)...

The senior bank (👇) had a small ($1 M) LOC in place. Nothing had ever been drawn and nothing was ever expected to be drawn.

We get their comments back on our intercreditor agreement and it is a sea of red ink.

Some of my “favorite” of their comments:

We’ll do the Top 3 Letterman style (reverse order in case you are young):

3) In the event of a default you need to wait 12 months to go against any collateral AFTER we have been repaid in full.

2) Sure, we’ll give you the option to buy us out so you can control your own destiny. How does 110% of par sound?

1) And my FAVORITE comment of theirs on the intercreditor agreement:

We don’t want to have to inform you if we have given notice, or take any enforcement action. You need to call us to find out if we have taken any enforcement action.

So, what was my response:

We drafted a new document that included language basically saying that any extension or renewal (automatic or otherwise) with the senior bank was an event of default under our loan agreements.

Between that, and several uncomfortable conversations between the senior bank and their own customer (the company) we final prevailed on all counts and got the deal done.

So, fast forward to two weeks ago, and the company has an agreement to refinance us out “before the end of the month” using a deal under the Main Street Lending program.

On Thursday (the 30th) I checked in to see how they were coming...

There was a snag! I was SHOCKED to hear the problem was the senior lender!

Yesterday, I heard they got it worked out, and the deal is moving forward tomorrow.

Intercreditor Note 1: I’ve had one head of commercial banking tell me:

“Yes, we love to put in place intercreditor agreements”

And

“No, we never do any intercreditor agreements”

And

“Well, it depends on the situation”

All three comments were within 2 months of each other.

Intercreditor Note 2: I’d like to think that I’m a reasonable guy, and some commercial banks are terrific.

For those that aren’t, I believe the biggest problem is a lack of experience/sophistication.

Intercreditor Note 3: Mezz lenders can develop a competitive advantage if they can work through intercreditor agreements in a constructive and timely manner.

Final Note: Assuming the refinancing occurs tomorrow as planned, it will be a 19.6% IRR for just under a 2 year hold.

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