Private Credit: Legal Structures, Creditor Rights, and Distressed Debt Strategy

The standstill provision in a first-lien and second-lien intercreditor agreement restricts the junior lender's ability to enforce its security interest for a defined period after the senior lender delivers written notice of default. The standstill period should be limited in duration to no more than one hundred eighty days and should terminate automatically if the senior lender fails to pursue enforcement within a defined time after the standstill expires.

The junior lender must negotiate carve-outs from the standstill for actions necessary to preserve collateral value, including the right to bid at a foreclosure sale and the right to file a proof of claim in a bankruptcy proceeding. Leveraged finance and debt finance counsel negotiating intercreditor terms must ensure that the standstill scope does not prevent the junior lender from protecting its position in circumstances where delay would cause irreversible value destruction.

A unitranche loan presents a single loan agreement to the borrower but divides economic interests between first-out and last-out lenders through an agreement among lenders. Voting disputes arise because the first-out and last-out lenders may hold materially different preferences about amendment, waiver, and enforcement decisions. Loan agreements and disputes counsel must confirm that the agreement among lenders clearly defines which decisions require unanimous consent, which require majority first-out approval, and which require majority last-out approval, particularly for amendments to financial covenants and collateral release provisions.

A maintenance financial covenant is tested at the end of each fiscal quarter and triggers an event of default automatically when the tested metric falls outside the agreed threshold. The event of default entitles the lender to accelerate the full outstanding principal balance, stop funding any undrawn commitments, and demand immediate repayment unless the borrower obtains a waiver within any applicable grace period. Creditors rights counsel managing a covenant breach must confirm that the lender's default notice is served in strict compliance with the notice provisions, since defective notice can restart the cure period and delay enforcement.

A private credit lender facing collateral value deterioration can demand additional security when the loan agreement includes a borrowing base or collateral maintenance covenant requiring the borrower to maintain collateral value above a defined coverage ratio. When the borrower fails to meet a collateral coverage threshold, the lender's remedies include demanding cash paydown of the outstanding balance and requiring the pledge of additional unencumbered assets. Asset-based lending counsel monitoring a deteriorating credit must conduct a field examination of the borrower's asset base to verify that collateral valuations supporting the original commitment remain accurate before any additional advance is made.

An out-of-court workout avoids the automatic stay that prevents creditors from enforcing their rights upon a Chapter 11 filing, preserving the lender's ability to negotiate from a position of strength without bankruptcy court limitations on creditor remedies. Restructuring and insolvency counsel advising a private credit lender must assess whether the borrower's capital structure complexity makes consensual resolution achievable or whether a pre-packaged Chapter 11 provides a faster and more certain path to the same outcome.

Debtor-in-possession financing provided during a Chapter 11 proceeding typically requires court approval and may prime existing secured claims if the existing lender's collateral is adequately protected. Chapter 11 counsel representing an existing secured creditor must move quickly, since DIP motions are frequently presented on an emergency basis that gives objecting creditors as little as forty-eight hours to respond.

A private credit fund manager registered as an investment adviser must maintain written policies governing valuation of illiquid credit assets, conflict of interest management between the fund and the manager, and disclosure of material information to limited partners. SEC examinations of private credit advisers increasingly focus on loan valuation methodologies, since subjective valuation of non-traded credit positions creates conflicts of interest when manager fees depend on the reported net asset value. SEC compliance counsel preparing a private credit manager for examination must confirm that valuation policies are documented, consistently applied, and supported by independent third-party validation for all significant positions.

A security interest in personal property collateral, including accounts receivable, inventory, equipment, and general intangibles, must be perfected through filing a UCC-1 financing statement in the jurisdiction where the debtor is organized. The financing statement must correctly identify the debtor's legal name as it appears in organizational documents filed with the state of formation, since a name error in the UCC-1 can render the filing seriously misleading and the security interest unperfected. The following table summarizes the principal UCC perfection methods by collateral type: