Gratuitous Bailee/Agent for Perfection Clause
(Split Collateral Intercreditor Agreement)

Summary

This gratuitous bailee/agent for perfection 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. Under the Uniform Commercial Code, a security interest in certain types of collateral (referred to in these sample provisions as "Pledged Collateral") can be, or must be, perfected by possession or "control." In a transaction involving liens in favor of multiple classes of secured parties, this creates a problem in that possession or control may be possible only for one collateral agent at a given time. The intercreditor agreement solves this problem by appointing each of the asset based facility collateral agent and the term loan facility collateral agent (which, until the discharge of its respective obligations, may have possession or control of Pledged Collateral) as gratuitous bailee and agent for purposes of perfecting the second lien of the other collateral agent in the Pledged Collateral. The appointments of the asset based collateral agent and the term loan collateral agent are set forth in Sections and , respectively. Sections, and protect the collateral agent acting as bailee/agent by clarifying the limits of its role as bailee/agent and stipulating that the other collateral agent and secured parties waive any claims against it in such capacity. Section sets forth the mechanics of how any Pledged Collateral remaining in the possession (or subject to the control) of a collateral agent will be handled following the discharge of such collateral agent's obligations. Note that this intercreditor agreement clause contemplates 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. This clause refers 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 (e.g., a trustee for a group of noteholders or obligations under an indenture). This clause 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: Access and Use Rights • Split Collateral Matters: Defining "Priority Collateral" • 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 agreements, 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.