Intercreditor Agreement and Contractual Restructuring of LBOs

Abstract

547Leveraged buyout (LBO) transactions are corporate acquisitions financed with multiple layers of debt and equity and form a large subset of the leveraged finance markets. In European LBOs various creditor-categories, the priorities, control and restructuring options are invariably controlled by intercreditor agreements. They set out a basis for a privatised insolvency procedure. Such privatised procedures are often considered both theoretically and practically impossible because of the risk of strategic creditor actions, the incomplete contracting problem, the incentive effects of agency costs and the difficulties of creditor coordination. This article sets out empirical findings how English law governed intercreditor agreements deal with strategic creditor actions and difficulties in creditor coordination, while creating a structured bargaining space for resolution of financial distress. The empirical analysis consists of content analysis of market ICAs and interviews. I argue that contractual solutions for dealing with financial distress in corporate finance are both theoretically and practically possible. ICAs deal with the most important strategic creditor actions and enable effective restructuring to take place contractually. Also, they can operate between sophisticated multi-round players and without necessarily resorting to the statutory procedures.548