Application of Proceeds and Turnover Clause
(Split Collateral Intercreditor Agreement)

Summary

This application of proceeds and turnover clause is used in a standard intercreditor agreement in connection with a syndicated loan transaction involving a secured asset-based facility and a secured term loan facility. This clause contains drafting notes and practical guidance. These clauses set forth (1) the order in which proceeds of a realization on particular collateral are required to be applied to the asset based facility debt and to the term loan debt and (2) the treatment of any particular collateral or proceeds thereof received by the collateral agent in a junior position with respect to such collateral (or any other junior lien secured party) at a time when the debt entitled to a first lien on such collateral has not been fully satisfied. Section sets forth the application of proceeds or "waterfall" provision, which dovetails with the lien priorities set forth in Section 2 (see Lien Priorities Clause (Split Collateral Intercreditor Agreement))). The waterfall in this sample provision specifies that costs and expenses of the asset based facility collateral agent and the term loan collateral agent are to be repaid from the proceeds of the asset based priority collateral and the term loan priority collateral, respectively, before any other obligations. This is a common approach, but some intercreditor agreements leave these matters to the respective loan documents. Section sets forth the requirement that collateral or proceeds received by the collateral agent holding a second lien on such collateral or proceeds or any other second lien secured party with respect to such collateral, at a time when any first lien obligations secured by such collateral remain outstanding, will be paid over ("turned over") to the collateral agent holding a first lien on such collateral. Note that these intercreditor agreement clauses contemplate a financing that includes the following elements: • Collateral and guarantee support from the borrower and other loan parties, generally including a group of the borrower's subsidiaries and the borrower's immediate parent entity (Holdings). Holdings, the borrower and these subsidiaries are typically referred to collectively as "grantors," since they have granted liens on their assets to secure the credit facilities. • The collateral securing the asset based facility debt and the term loan debt comprises the same assets of the grantors, although the asset based facility lenders have a first priority lien with respect to a certain subset of assets and the term loan lenders have a first priority lien with respect to a different subset of assets. The asset based facility lenders have a second priority lien with respect to the assets on which the term loan lenders have a first priority lien; and, conversely, the term loan lenders have a second priority lien with respect to the assets on which the asset based facility lenders have a first priority lien. While it is often the case in split collateral structures that both lender groups benefit from security interests in substantially all the assets of the grantors, there are also situations in which the parties negotiate otherwise. • A single collateral agent is the holder of the first lien on the subset of collateral for the benefit of a syndicate of asset based facility lenders, and a separate single collateral agent is the holder of the first lien on the subset of collateral for the benefit of a syndicate of term loan lenders. It is the liens of the agents, and the rights of the agents and the other parties as creditors secured by those liens, that are subject to the priorities and other provisions of the split collateral intercreditor agreement. • Optional definitions, language and clauses are included in these clauses if the parties have agreed to an asset based facility first lien cap amount (i.e., a cap on the amount of the asset based facility debt treated as senior to the term loan debt with respect to the asset based priority collateral). Lien caps are less common in split collateral intercreditor agreements than in first lien/second lien intercreditor agreements. Sometimes, however, in split collateral intercreditor agreements, the term loan lenders will negotiate a cap on the first lien of the asset based facility in the asset based priority collateral, as provided in the optional definitions, language and clauses. A cap on the first lien of the term loan lenders in the term loan priority collateral in a split collateral structure is uncommon and would require additional definitions, language and clauses. These clauses refer to an "ABL Collateral Agent" and a "Term Loan Collateral Agent" and to the "ABL Obligations" and "Term Loan Obligations." However, it is common for these arrangements to involve issuances of notes or other debt securities, in which case references to the collateral agent for a syndicate of lenders or obligations under a credit facility should be changed to refer to the appropriate parties under the relevant governing debt documents (for example, a trustee for a group of noteholders or obligations under an indenture). These clauses contain optional and alternate clauses, drafting notes and negotiation tips and should be read in conjunction with the following practice notes: • Intercreditor Agreements • Lien Subordination vs. Debt Subordination • Market Trends 2020/21: Split Collateral Intercreditor Agreements • Split Collateral Matters: Defining "Priority Collateral" • Split Collateral Matters: Access and Use Rights • First Lien Debt and Intercreditor Arrangements • First Lien Debt Cap • "Waterfall": Priority of Application of Proceeds • Remedies Block: Standstill • Turnover Provisions • Second Lien Lender Buyout Option • Release of Second Lien on Sale of Collateral • Amendments and Waivers to First Lien Documents and Second Lien Documents • Consent to DIP Financing and Use of Cash Collateral • 363 Sales and Adequate Protection For a full listing of key content covering intercreditor agreeements, see Intercreditor Agreements Resource Kit. For a full listing of key content covering asset-based lending, including agreements, security, guaranties, perfection, and priorities, see Asset-Based Lending Resource Kit.