Document type: Toolkit Practice area: Finance — Leveraged Finance Jurisdiction: United States Last reviewed: 5 September 2026

Tool 1 — Lender term sheet (agree this first)

AGREEMENT AMONG LENDERS — INDICATIVE TERMS Borrower: [] Facility: $[] senior secured term loan

Term Provision
First Out Tranche $[], held by []
Last Out Tranche $[], held by []
Blended rate to Borrower SOFR + [__]
First Out rate SOFR + [__]
Last Out rate SOFR + [__]
Application mechanic Agent applies directly per the AAL; Agent to join the AAL
Fees Upfront and amendment fees allocated [pro rata / per the skim]
Prepayment premium Allocated [__]
Trigger Event Insolvency; acceleration; payment default continuing 5 Business Days; Total Net Leverage above []:1.00 for two consecutive quarters; commencement of Enforcement Action. Reverts if leverage below []:1.00 for two consecutive quarters
Waterfall on Trigger Expenses; First Out interest; First Out principal in cash; Last Out interest incl. PIK; Last Out principal; other; Borrower
Ordinary amendments Required Lenders across both tranches
Controlling Party (enforcement) First Out, subject to a [120]-day standstill after which Last Out may act
Sacred rights Per Schedule A
Buyout Option Last Out may purchase First Out at par + accrued + any applicable prepayment premium; 10 Business Days' notice; 15 Business Days to close; enforcement suspended throughout
Turnover Excess held in trust, segregated, turned over in the form received
Transfers AAL joinder required; ROFR in favor of the other tranche
Governing law New York

Annotation. Agree this before the credit agreement's terms are final. The lenders' relative positions are the deal, and negotiating them after funding leaves all the leverage with whoever is least in a hurry.

Tool 2 — Skim and payment application

Application of Payments (No Trigger Event). Prior to the occurrence of a Trigger Event, the Agent shall apply all payments received in respect of interest so that (a) the First Out Lenders receive interest at the First Out Rate on the First Out Obligations, and (b) the Last Out Lenders receive interest at the Last Out Rate on the Last Out Obligations, in each case notwithstanding any provision of the Credit Agreement providing for pro rata application. Payments of principal shall be applied pro rata between the tranches, except as otherwise provided herein.

Turnover of Skim. If, notwithstanding the foregoing, any Lender receives interest in excess of the amount to which it is entitled under this Section, such Lender shall hold the excess in trust and promptly pay it over to the Lenders entitled thereto.

Other Amounts. (a) Upfront and commitment fees shall be allocated []. (b) Amendment and consent fees shall be allocated [pro rata / per the tranche whose consent is required]. (c) Any prepayment premium, make-whole, or call protection shall be allocated []. (d) Default interest shall be allocated [pro rata / per the skim]. (e) PIK Interest accruing on the Last Out Obligations shall be capitalized [monthly / quarterly] and shall constitute Last Out Obligations for all purposes, ranking in the Waterfall as provided in clause fourth. (f) Original issue discount shall be allocated [__].

Delayed Draw and Incremental Amounts. Any Delayed Draw Term Loan or Incremental Term Loan shall be allocated []% to the First Out Tranche and []% to the Last Out Tranche, [fixed at the Closing Date / determined at the time of funding by agreement of the Lenders], provided that no Lender shall be required to fund more than its Commitment.

Annotations.

  • The turnover of skim provision is the backstop for the case where the agent applies pro rata, whether by system error or because it is not a party. Include it even where the agent joins.
  • Clause (e) on PIK is routinely omitted and matters enormously in a stressed credit, where accrued PIK can be a large fraction of the last-out claim.
  • The delayed draw allocation must be settled at documentation. Deciding it at draw, in a deteriorating credit, is a negotiation nobody wants.

Tool 3 — Trigger Event

"Trigger Event" means the occurrence of any of the following:

(a) any Insolvency Proceeding with respect to the Borrower or any other Loan Party; (b) any acceleration of the Obligations, or any Obligations becoming automatically due and payable; (c) any failure to pay any principal or interest when due, which continues for [five] Business Days; (d) the Total Net Leverage Ratio exceeding [__]:1.00 as of the last day of each of two consecutive fiscal quarters; or (e) the commencement of any Enforcement Action.

Reversion. A Trigger Event arising solely under clause (d) shall cease to exist if the Total Net Leverage Ratio is [__]:1.00 or less as of the last day of each of two consecutive fiscal quarters thereafter, whereupon the provisions applicable prior to a Trigger Event shall again apply, provided that no amount properly applied under the Waterfall shall be recoverable.

"Buyout Trigger" means (i) any Trigger Event, or (ii) any Event of Default under the Credit Agreement, or (iii) delivery by the Controlling Party of any notice of intent to commence an Enforcement Action.

Annotations.

  • Never define the Trigger Event as "any Event of Default." A late compliance certificate would stop the last out's skim, which nobody intends.
  • Clause (c)'s grace period prevents an administrative payment failure from triggering.
  • Clause (d)'s headroom and persistence — the level should sit above the credit agreement covenant, and one bad quarter should not do it.
  • The Reversion provision is the last out's most valuable win and the first out's most common concession. The proviso preventing recovery of amounts already applied is essential.
  • The Buyout Trigger is deliberately broader. The last out wants the option available early, before the first out's position hardens.

Tool 4 — Waterfall

Application of Proceeds After a Trigger Event. After the occurrence and during the continuance of a Trigger Event, all payments, distributions, and proceeds of Collateral shall be applied in the following order:

first, to the payment of the Agent's fees, indemnities, costs, and expenses, including all costs of any Enforcement Action; second, to the payment of accrued and unpaid interest (including default interest) on the First Out Obligations; third, to the payment of the principal of the First Out Obligations, until paid in full in cash; fourth, to the payment of accrued and unpaid interest on the Last Out Obligations, including capitalized PIK Interest; fifth, to the payment of the principal of the Last Out Obligations; sixth, to the payment of all other Obligations; and seventh, to the Borrower or as a court of competent jurisdiction may direct.

Split Collateral. [Where a super-senior revolver exists:] Proceeds of ABL Priority Collateral shall be applied first to the Revolving Obligations to the extent provided in the Intercreditor Agreement, and thereafter as set forth above. Proceeds not identifiable to a specific pool shall be allocated [pro rata by book value / per the appraised values most recently delivered].

No Effect on Credit Agreement. Nothing herein modifies the Borrower's obligations under the Credit Agreement, and the Borrower shall be entitled to treat all Obligations as a single class.

Annotations.

  • "In full in cash" in clause third matters: a first out receiving securities under a plan has not been paid in full for waterfall purposes without it.
  • Clause fourth's express inclusion of capitalized PIK prevents a fight about whether accrued PIK ranks with interest or with principal.
  • The mixed-proceeds allocation should be settled at documentation with a stated methodology.
  • The final paragraph protects the borrower's position and supports the characterization that the AAL is a creditor arrangement rather than an amendment of the credit agreement.

Tool 5 — Controlling party, standstill, and sacred rights

Controlling Party. The First Out Lenders shall constitute the Controlling Party with respect to any Enforcement Action, provided that if the First Out Lenders have not commenced an Enforcement Action within [120] days after the occurrence of a Trigger Event (the "Standstill Period"), the Last Out Lenders shall thereafter constitute the Controlling Party. The Standstill Period shall terminate immediately upon any Insolvency Proceeding.

No Enforcement During Buyout. Notwithstanding anything herein, during any Buyout Exercise Period no Enforcement Action shall be commenced or continued, no acceleration shall be declared, and no remedy shall be exercised, by any Lender or by the Agent at the direction of any Lender.

Amendments. Except as set forth on Schedule A, all amendments, waivers, and consents under the Credit Agreement shall be determined by the Required Lenders as defined therein, computed across both Tranches.

SCHEDULE A — Sacred Rights. The following require the written consent of each affected Lender:

  1. Reduction of the principal amount of, or the rate of interest or fees payable on, such Lender's Obligations;
  2. Extension of the maturity of, or any scheduled date of payment on, such Lender's Obligations;
  3. Any modification of the Waterfall, the First Out Rate, the Last Out Rate, or the definition of Trigger Event;
  4. Release of all or substantially all of the Collateral or the Guarantees;
  5. Any modification of this Schedule A, of the definition of Required Lenders, or of the definition of Controlling Party;
  6. Any increase in the other Tranche or issuance of additional Obligations ranking ahead of such Lender's Obligations;
  7. Any modification of the Buyout Option; and
  8. Any modification of the Turnover provisions.

Annotations.

  • Item 7 is the one most often omitted. A buyout option amendable by required lenders — which the first out may effectively control in a stressed credit — is not an option.
  • The Standstill Period's start date must be objectively determinable. "After the occurrence of a Trigger Event" works only if the trigger is itself objective, which is why the Trigger Event definition avoids judgment-based elements.
  • The No Enforcement During Buyout provision should be freestanding and emphatic, because it is the provision most likely to be tested.

Tool 6 — Buyout option

Buyout Option. At any time after the occurrence of a Buyout Trigger, Last Out Lenders holding a majority of the Last Out Obligations may, by written notice to the First Out Lenders and the Agent (a "Buyout Notice"), elect to purchase all, but not less than all, of the First Out Obligations.

Price. The purchase price shall be, in cash: (a) 100% of the outstanding principal amount of the First Out Obligations; plus (b) accrued and unpaid interest thereon to the closing date; plus (c) any prepayment premium, make-whole, or call protection that would be payable under the Credit Agreement upon a prepayment of the First Out Obligations on such date; plus (d) any accrued and unreimbursed expenses payable to such Lenders under the Credit Agreement. No other amount shall be payable, and no Lender shall be entitled to any premium for the sale.

Closing. Within [15] Business Days after the Buyout Notice.

Buyout Exercise Period. The period from delivery of a Buyout Notice until the earlier of (i) the closing and (ii) the expiration of such [15] Business Day period. During the Buyout Exercise Period, no Enforcement Action shall be commenced or continued.

Terms of Sale. The sale shall be without recourse and without representation or warranty, other than as to (i) the selling Lender's title, free of Liens created by it, (ii) its authority, and (iii) the outstanding amount.

Participation. Each Last Out Lender may participate pro rata. Any Last Out Lender declining to participate shall be deemed to have offered its participation to the participating Last Out Lenders, who may take it up pro rata.

Insolvency. The Buyout Option shall be exercisable during any Insolvency Proceeding, and the parties agree that the exercise of the Buyout Option is a transaction solely among the Lenders that does not require the consent of, or notice to, the Borrower or any court.

Failure to Close. If the closing does not occur within the period, the Buyout Notice shall be void, the Buyout Exercise Period shall end, and the Last Out Lenders may not deliver another Buyout Notice for [60] days, absent a subsequent Buyout Trigger.

Annotations.

  • The four provisions that make this operative are the enforcement suspension, the certain price, the short closing period, and the take-up mechanism.
  • Clause (c) on prepayment premiums must be resolved at documentation. Leaving it silent produces a dispute at the moment the option is exercised.
  • The insolvency paragraph preserves the reliable remedy in the one situation where the rest of the AAL's bankruptcy provisions are least certain.
  • The failure-to-close cooling-off protects the first out against repeated tactical notices that suspend its enforcement rights indefinitely.

Tool 7 — Turnover and bankruptcy provisions

Turnover. If any Lender receives any payment, distribution, or proceeds — whether in cash, securities, or other property, whether by voluntary payment, setoff, enforcement, or in any Insolvency Proceeding — in excess of the amount to which it is entitled under the Waterfall, such Lender shall:

(a) hold such excess in trust for the Lenders entitled thereto; (b) maintain it segregated from its other assets; (c) promptly pay it over, in the form received, with any necessary endorsement; and (d) not exercise any right of setoff against such excess.

This Section shall survive any Insolvency Proceeding, any discharge, and any termination of the Credit Agreement.

Section 510(a). The Lenders agree that this Agreement is a "subordination agreement" within the meaning of Section 510(a) of the Bankruptcy Code, and intend that it be enforceable in any Insolvency Proceeding to the same extent as under applicable non-bankruptcy law.

Separate Classes; Voting. The Lenders agree that the First Out Obligations and the Last Out Obligations shall be treated as separate classes of claims in any Insolvency Proceeding. Each Lender shall vote its claims only in respect of its own Tranche, shall support any plan that gives effect to the Waterfall, and shall not support any plan that does not.

Limitations. For so long as any First Out Obligations remain outstanding, no Last Out Lender shall, in any Insolvency Proceeding: (a) oppose any debtor-in-possession financing or use of cash collateral supported by the Controlling Party; (b) seek adequate protection except to the extent the Controlling Party seeks it; (c) object to any sale or disposition supported by the Controlling Party; or (d) contest the validity, perfection, or priority of the Liens securing the Obligations.

Annotations.

  • Layer these deliberately. The turnover provision is a contract claim between non-debtors and requires nothing of the court — it is the reliable one. The § 510(a) characterization costs nothing. The separate classes and voting provisions may be enforced. The limitations on objections are the least certain, since the Code confers standing on parties in interest.
  • Do not build the structure on classification or voting. Build it on turnover and on the buyout option.
  • Clause (d) of the Turnover provision — no setoff against the excess — closes a real gap.

Tool 8 — Transfers, joinder, and agent joinder

Transfers. No Lender may assign or participate any Obligations unless the assignee executes and delivers a joinder to this Agreement in the form of Exhibit A. The Agent shall not record any assignment in the Register unless such joinder has been delivered. A transferor that assigns without a joinder shall remain liable for the performance of this Agreement in respect of the transferred Obligations.

Right of First Refusal. Before assigning any First Out Obligations to any Person other than an Affiliate, the assigning Lender shall offer them to the Last Out Lenders on the same terms, exercisable within [10] Business Days. [And reciprocally.]

Prohibited Transferees. No Obligations may be assigned to the Borrower, any Loan Party, any Affiliate of the foregoing, any Sponsor, any competitor of the Borrower, or any Disqualified Institution.

Agent Joinder. The Agent joins this Agreement solely for the purposes of (i) applying payments in accordance with the Skim and the Waterfall, (ii) recording assignments subject to the joinder requirement, and (iii) acting at the direction of the Controlling Party. The Agent shall have no other obligation hereunder, shall be entitled to the benefit of all protective provisions of the Credit Agreement, and shall be indemnified by the Lenders pro rata for any action taken in accordance herewith.

Annotation. The agent joinder is what allows direct application rather than pro rata payment plus turnover, and it is the market norm. The indemnity is the price and is not negotiable.

Tool 9 — Buyout exercise notice

[Date] — By email and courier

To: [First Out Lenders]; [Administrative Agent]

Re: Buyout Notice under Section [] of the Agreement Among Lenders dated []

1. Buyout Trigger. A Buyout Trigger occurred on [date], namely [describe: the Total Net Leverage Ratio exceeded [__]:1.00 as of [dates], as reflected in the Compliance Certificates delivered [dates] / the Borrower failed to pay interest due [date], which failure continued for five Business Days].

2. Election. Last Out Lenders holding [__]% of the Last Out Obligations hereby elect to purchase all of the First Out Obligations.

3. Price. Based on the Agent's records as of [date], we compute: principal $[]; accrued interest to the anticipated closing date $[]; prepayment premium $[]; unreimbursed expenses $[]; total $[__]. Please confirm or provide a corrected computation within three Business Days.

4. Closing. [Date, being fifteen Business Days from the date hereof], by assignment agreement in the form of Exhibit [__] and payment in immediately available funds.

5. Buyout Exercise Period. The Buyout Exercise Period has commenced. Pursuant to Section [__], no Enforcement Action may be commenced or continued during such period, and no acceleration may be declared. We ask the Agent to confirm receipt and to note this in its records.

6. Participation. Participating Last Out Lenders and their pro rata shares are set out on Annex A. Any Last Out Lender wishing to participate must notify the undersigned within [three] Business Days.

Annotations.

  • Paragraph 5 is the operative one and should be prominent. Confirming the suspension in writing, on delivery, is the step that prevents a first out from arguing it did not apply.
  • Paragraph 3's request for confirmation within three business days forces the price dispute into the exercise period rather than into the closing.
  • Pre-draft this document. Producing it under pressure wastes days the option does not have.

Tool 10 — Definitional reconciliation table

Run before signing, across every document in the structure.

Term Credit Agreement § AAL § Intercreditor § Same meaning? If not, deliberate?
Required Lenders
Controlling Party
Event of Default
Trigger Event
Enforcement Action
Obligations
Collateral
Insolvency Proceeding
Loan Party / Credit Party
Total Net Leverage Ratio
Consolidated EBITDA
Prepayment premium / make-whole
Assignment and joinder requirements
Disqualified Institution

The specific risk. The credit agreement's Required Lenders may direct the agent to accelerate; the AAL may vest that decision in a tranche that is not a majority. Resolve it in the credit agreement, by defining Required Lenders by reference to the AAL's Controlling Party for enforcement matters, and by entitling the agent to rely on the Controlling Party's certification.

Assign this to one person, and have them do it in one sitting with all documents open. It is the last step before signing and, measured against the cost of the defects it finds, the highest-value hour in the transaction.

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