Uptier Transactions and Drop-Down Financing

Summary

This practice note describes uptier transactions and drop-down financings, including structuring liability management transactions (LMTs), loan documentation, and representative transactions. LMTs are used by borrowers to restructure their existing liabilities and free up liquidity that may be restricted by the covenants in their current credit facilities. There are two types of transactions that tend to dominate the LMT landscape: "uptier" transactions and "drop-down" financings. These transactions effectively enhance the participating new money creditors' exposure to the borrower and frustrate the economic expectations of other creditors (usually the nonparticipating creditors). Uptier transactions and drop-down financing share certain general characteristics and have distinct differences. This practice note explores those characteristics and differences and explains how lenders can seek protections in credit agreements considering these types of transactions.