Document type: Checklist Practice area: Finance — Leveraged Finance Jurisdiction: United States, with cross-border notes Last reviewed: 5 September 2026

Section 1 — Process

  • Credit agreement and AAL drafted in parallel, by teams in contact
  • One partner owns consistency across all documents
  • AAL term sheet agreed among lenders before the credit agreement is final
  • If the long-form AAL cannot be completed by closing, a binding term sheet covers waterfall, trigger, control, and buyout
  • Not closing with the AAL "to be agreed"

Section 2 — Tranches and the skim

  • Tranche sizes set against actual collateral coverage and enterprise value
  • Blended rate reconciles to the tranche rates and amounts
  • Application mechanic chosen: direct application by the agent (preferred) or pro rata with turnover
  • Fees allocated: upfront, commitment, amendment, agency
  • Prepayment premiums and make-wholes allocated
  • Default interest allocation
  • PIK interest: waterfall position and compounding
  • Original issue discount allocation
  • Delayed draw and incremental amounts: allocation fixed at closing or determined at draw; may either tranche decline?

Section 3 — Trigger Event

  • Not "any Event of Default"
  • Insolvency proceeding
  • Acceleration
  • Payment default with a short grace period
  • Financial trigger with headroom above the credit agreement covenant and persistence (two consecutive quarters)
  • Commencement of an Enforcement Action
  • Reversion mechanic if the financial trigger cures
  • Buyout trigger defined separately and more broadly than the waterfall trigger

Section 4 — Waterfall

  • Ordinary-course application before a Trigger Event stated expressly
  • Sequential application after: expenses; first-out interest; first-out principal in cash; last-out interest including PIK; last-out principal; other obligations; borrower
  • "In cash" included — a first out paid in securities has not been paid in full otherwise
  • Post-trigger interest treatment for the last out
  • Split waterfalls defined if a super-senior revolver holds priority over working capital collateral
  • Mixed proceeds addressed
  • Enforcement proceeds versus scheduled payments distinguished

Section 5 — Voting and control

  • Ordinary amendments: controlled by required lenders across both tranches, stated expressly in the AAL
  • Controlling Party for enforcement defined
  • Standstill period before the non-controlling tranche may act (90–180 days)
  • Standstill terminates on insolvency
  • Enforcement suspended during any Buyout Exercise Period
  • Sacred rights include:
    • Reduction of that tranche's principal, interest, or fees
    • Extension of that tranche's maturity or payment dates
    • Any change to the Waterfall, the Skim, or the Trigger Event definition
    • Release of all or substantially all Collateral or Guarantees
    • Changes to the sacred rights list, voting thresholds, or Controlling Party definition
    • Any increase in the other tranche
    • Any change to the Buyout Option

Section 6 — Buyout option

  • Trigger defined
  • Price defined: par plus accrued plus whether any prepayment premium or make-whole applies
  • Notice period (commonly 10 business days)
  • Closing period (commonly 15 business days)
  • Enforcement suspended from notice through closing or expiry
  • All-or-nothing purchase
  • Without recourse, without representation except title, authority, and amount
  • Pro rata participation with a take-up mechanism for non-participants
  • Survives and is exercisable during an insolvency proceeding
  • Reciprocal option in the first out's favor, if agreed

Section 7 — Turnover and bankruptcy

  • Turnover provision: excess amounts held in trust, segregated, turned over promptly, in the form received with endorsement
  • Applies to distributions in an insolvency proceeding
  • Section 510(a) characterization stated
  • Deemed separate classes provision
  • Agreement to vote within one's own tranche and to support a plan giving effect to the waterfall
  • Limitations on objecting to DIP financing, cash collateral use, and sales supported by the Controlling Party
  • Buyout option preserved expressly in an insolvency proceeding
  • Understood that turnover carries the weight and classification provisions may not be enforced

Section 8 — Transfers

  • Credit agreement assignment provisions require an AAL joinder
  • Transferor remains liable if a joinder is not obtained
  • Agent will not register a transfer without a joinder
  • Right of first refusal in favor of the other tranche, with a short exercise period
  • Prohibited transferees: borrower affiliates, competitors, disqualified institutions
  • Minimum hold or minimum assignment amounts
  • Revolver tranche transfer constraints, if the first out is a revolver

Section 9 — The agent

  • Agent has joined the AAL for payment application purposes
  • Agent indemnified by the lenders
  • Required Lenders in the credit agreement defined by reference to the Controlling Party, or directions delivered through the Controlling Party
  • Agent entitled to rely on the Controlling Party's certification
  • Agent's operations team configured with the waterfall and the skim, confirmed at closing

Section 10 — Super-senior revolver, if applicable

  • Separate credit agreement and intercreditor
  • Collateral split defined, or a super-priority cap
  • Cap sized to accommodate commitment plus interest, fees, protective advances, and hedging
  • Access rights for realizing working capital collateral
  • Standstill and enforcement allocation
  • Advance consent to DIP financing and cash collateral use
  • Permitted amendments without the other's consent, including commitment increases
  • Purchase option at par

Section 11 — Definitional reconciliation

Run across the credit agreement, the AAL, and any intercreditor. Do this before signing.

Term Credit agreement AAL Intercreditor Consistent?
Required Lenders / Controlling Party
Event of Default
Trigger Event
Enforcement Action
Obligations
Collateral
Insolvency Proceeding
Loan Party
Total Net Leverage Ratio
Consolidated EBITDA
Prepayment premium
Assignment and joinder

Section 12 — Administration

  • Payment application verified in the first quarter and reconciled quarterly thereafter
  • Trigger Event monitoring assigned by name
  • Amendment process defined internally, with expected response times
  • Information sharing among lenders agreed, particularly where a first-out bank has a separate borrower relationship
  • Transfers checked for joinder before registration
  • Buyout price modeled at intervals, and funding capacity confirmed against the fund's own capital call notice periods
  • Buyout notice pre-drafted
  • Agent's transfer registration process confirmed in advance

Section 13 — Borrower-side review

The borrower is not a party to the AAL. These are the questions to ask and the terms to negotiate in the documents it does sign.

Questions to ask the lenders:

  • Who is the agent, and which lenders hold which tranche?
  • Who controls enforcement? Who controls amendments and waivers?
  • Is there a buyout option, and on what trigger?
  • Is there a trigger event tied to a financial ratio in our credit agreement, and at what level relative to our covenant?
  • May we see the AAL, or a summary of the waterfall, voting construct, and buyout option?

Terms to negotiate in the credit agreement:

  • A response covenant: the agent responds to consent requests, or identifies required consents and expected timing, within a stated period
  • Consent rights over assignments to competitors and disqualified institutions
  • Notice of transfers that change tranche composition
  • Agent replacement rights on defined triggers
  • Clarity on how prepayments are applied between tranches
  • Amendment fee allocation, so the borrower does not pay twice

Expectations to set internally:

  • Finance team briefed that in a stressed credit the agent may not answer quickly, and that this reflects lender process rather than bad faith
  • Understanding that crossing the AAL's financial trigger — which may sit above the credit agreement covenant — changes the lenders' internal arrangements and the borrower's counterparty dynamics

Section 14 — Red flags in an AAL

  • Trigger Event defined as "any Event of Default"
  • No suspension of enforcement during the buyout exercise period
  • Buyout option amendable by required lenders
  • Buyout price silent on whether prepayment premiums apply
  • No take-up mechanism for non-participating last-out lenders
  • Turnover provision without trust, segregation, and in-the-form-received language
  • Reliance on classification and voting provisions with no robust turnover
  • Assignment provisions that do not require a joinder
  • Agent not a party for payment application, with no turnover backstop
  • Required Lenders and Controlling Party definitions that can conflict
  • No reversion where the financial trigger cures
  • Fees, premiums, default interest, and PIK unallocated

Related documents