What am I buying with a 120 day standstill in the intercreditor?

Question

Reading a junior participation draft where the standstill runs 120 days from the senior's default notice. During that window I can't accelerate, can't start any enforcement, can't apply anything I'm holding. Separately the senior can make protective advances for taxes, insurance and completion costs that come ahead of me with no cap stated, and interest accrues at a default rate that isn't defined in this draft either.

So the question I'm sitting with is which term to spend my negotiation on. One view says shorten the standstill, because 120 days behind a senior at a default rate on a 14 month bridge is how a 55k position becomes a 20k position. Get it to 60 and at least your loss stops compounding while you wait.

The other view says the standstill length is close to meaningless to me. Even at day one I'm not going to foreclose a junior lien on a half-finished rehab. What I'd actually use is the right to receive the senior's default notice, the right to cure by making their payments, and a purchase option to buy out the senior at par plus accrued during a defined window. If I have those, 120 days is time I can use instead of time I lose. And a senior who caps protective advances is telling me more about how they'll behave than the standstill number does.

I've seen both traded. Curious what people here spend the ask on, because you don't usually get all of it.

stephen_ok9 · Answer

The uncapped protective advances would bother me more than either of the things you're choosing between. Undefined default rate plus uncapped advances means the senior can decide, after the fact, how much of the collateral value is theirs. Shortening the standstill to 60 days doesn't help if the number ahead of me grows without limit during those 60 days.

I'd ask for a cap and a definition first and treat the standstill as the thing I trade away to get them.

raj_mehta14 · Answer

A purchase option means I could pay off the senior entirely and step into first position, and then I'm the one deciding what happens to the property? That sounds like the only right in the list that actually gives control, and also the one I'd need the most cash to use. Do people size their gap positions assuming they might have to fund the senior's whole balance later, or is that mostly theoretical?

dmitri_v6 · Answer

@vellum it's not theoretical for people who plan for it, and the plan is the point. A buyout right you can't fund is a right you'll never exercise, so the practical version is either a smaller senior balance or a committed source of the takeout money before you sign.

@fathom, on your fork, I'd spend the ask on notice and cure and the buyout window, and I'd write the cure mechanics tightly. Notice to a specific address, a stated number of business days, cure by tender of the delinquent payments without curing non monetary defaults, and no requirement to cure the borrower's completion obligations. That last one gets people. A cure right that requires you to finish construction is a cure right you can't use.

How much of an intercreditor is enforceable against a bankruptcy trustee is a lawyer question and varies, so have counsel in that state read the standstill and the subordination separately. They do different work and drafts often blur them.

What am I buying with a 120 day standstill in the intercreditor?

3 replies