So, a Senior Secured loan has a Spring Maturity protection against the Senior Unsecured. However, would the protection still be effective if the Senior Unsecured is refinanced by a Secured debt before the Spring Maturity date?
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No the maturity is only sprung when the issuer fails to refi the unsecured 90 days (as an example) before the unsecured maturity.
Why would they design it this way though? For the company I'm looking at, it has 760m in senior secured and only 225m in unsecured. If the company fails to refi the unsecured, wouldn't it instantly put the company into a distressed situation as you suddenly have 760m to be paid?
Its favorable treatment of secured lenders and you definitely don't always see springing maturities. If you're a senior lender you're obviously taking on less risk and being compensated at a lower rate so you'd like for your loan to be "dealt with" before unsecured risk is refid. In the example you described above if there was no springing maturity, senior lenders can't force the Company into bankruptcy and if the Company does something crazy like refi the bonds by moving collateral out of the TL box to an unrestricted sub and raising debt against that (Jcrew) it could severely impact secured recoveries down the line one day when the Company files meanwhile the unsecured creditors got par + accrued. It just gives secured lenders more control over the situation and you might see it more often in hairier deals where secured lenders demand that sort of protection.
Appreciate the insight. I'm also trying to understand what would happen if the company refi their unsecured before spring maturity date? I mean just assume they just get refid by a something with similar seniority (senior unsecured in this case) with a longer maturity date than senior secured.
Wouldn't both the company and the 1st lien creditors want to see this happen? From a company's perspective, there would be no spring maturity clause available anymore because the existing facility has been refid, which means they might avoid 1st lien lender accelerate. And for 1st lien creditors, they are in front of the line now in terms of the maturity date, which I assume was their intention to put into place such spring maturity in the first place.
FYI, the senior secured is maturing in 2026 while the unsecured in early 2022. In light of COVID-19 impact and that a majority of company's buildings are leased, 1st lien might not get full recovery if they accelarate in 2021 using the spring maturity clause.
And yes, it's a hairy deal because the company is currently owned by Apollo, who is also a permitted holder for those two tranches.
If they refi the unsecured with whatever new instrument, and the maturity date is now behind the seniors, then the spring covenant will go away. There are lots of ways for the 1Ls to push the company into BK without the spring covenant if they're motivated to do that. Tons of companies will be asking for covenant relief over the next quarters and you can just say "nah".
Good luck w this apollo structure, i'd probably move on to something else.
You can think about senior in terms of claims on collateral (are you a first lien lender or an unsecured lender), time (if your maturity is sooner it is more likely to get paid at par than one that’s later), and structural seniority (if your debt is situated at a subsidiary that enables you to get paid before lenders to the parent). This type of clause gives secured lenders another type of seniority.
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