What is super senior financing?
Super senior financing structures are gaining momentum in the New Zealand market, particularly in acquisition financing. A super senior facility is a revolving credit facility (and if required, ancillary facilities) provided by a traditional bank lender that ranks ahead in an enforcement scenario to a term loan facility provided by a credit fund. This is where it gets the name ‘super senior’. Ordinary course, non-enforcement payments are made pari passu across the facilities.
The term loan facility is often referred to as a unitranche facility and is typically nonamortising. This is because credit funds do not expect to receive their capital back until maturity.
Because the super senior facility is first to be repaid in an enforcement scenario, it is viewed as less risky, and this is reflected in the pricing compared to the unitranche facility.
Why do we need super senior finance structures?
Following in the footsteps of Europe and Australia, the alternative credit market continues to expand in New Zealand, with more options available for borrowers to raise debt than just from the traditional bank lenders.
Unitranche lenders tend to offer more flexible terms, although often that comes at a price. Borrowers should also be aware that credit funds generally have call protection provisions in the form of a make-whole payment or early prepayment fees. This discourages early prepayment and gives the credit fund more certainty of return.
Credit funds are not traditionally able to provide working capital facilities or other ancillary facilities such as guarantee facilities or an overdraft. It is for this reason that a traditional bank lender is needed to provide the revolving credit facility and ancillary facilities.
Documentation
In Europe and Australia, the unitranche term loan and the super senior revolving credit facility are documented under the same loan agreement. However, this is less common in New Zealand – which we suspect is because (a) the nominal amounts of the super senior facilities are relatively small, and (b) the local New Zealand banks prefer to provide their revolving and ancillary facilities on their standard terms. This practice of documenting the facilities separately introduces an added layer of complexity and results in some of the cost and administrative efficiencies that the super senior/unitranche structure provides when compared to the more traditional senior/mezzanine structure being lost.
The security will usually be shared and held by a security trustee on behalf of both the senior lenders and the unitranche lenders as well as the hedging providers. Often in New Zealand, the security trustee is the same bank providing the super senior facility. This is less the case in Australia where independent security trustees are more common. An intercreditor agreement will then be entered into by all parties, to govern the relationship between the creditors. In New Zealand, the intercreditor provisions will usually be built into the Security Trust Deed, to avoid adding a further document to the mix.
Control
In return for holding the junior position in the recoveries waterfall, the unitranche lender is given control of the enforcement process. The super senior lender is afforded limited ability to take independent enforcement action following the occurrence of a ‘material event of default’ and/or after the expiry of a standstill period designed to give the unitranche lender time to decide what to do. Material events of default will be agreed on a deal by deal basis but at a minimum will include non-payment of a super senior facility, insolvency, and breach of the super senior financial covenant (if there is one).
The rights of secured hedging providers, often provided by the super senior bank, should not be ignored. Credit funds are generally unable to provide hedging and it is therefore usually the super senior bank who provides the hedging. The secured hedging sits alongside the super senior revolving credit facility in terms of enforcement recoveries but is sometimes subject to a cap. The reason for this is because the hedging will be for the whole loan amount and not just the revolving credit facility. Anything above the cap should rank alongside the unitranche facility on an enforcement.
What are we seeing in New Zealand?
We’ve found there is less consistency of terms in the New Zealand market as parties seek more simplified
structures than what you see in the UK and Australia. We’ve sometimes seen the bespoke approaches taken
have unintended or unanticipated consequences that aren’t flushed out until late in the documentation process.
Our key advice is to ensure everyone understands what they are signing up to and that they have good lawyers
familiar with the ins-and-outs of super senior structures. We strongly recommend that all parties agree to
a term sheet up-front which sets out the key terms before committing to a super senior structure.
