A waterfall in a credit agreement is a term used in finance to describe the order in which payments are made to investors or lenders in the event of a company`s default or bankruptcy. It outlines the priority and sequence in which these parties will receive their payments from the available assets or cash flow of the company.
Credit agreements typically have a complex structure of financial instruments and payment obligations, and the waterfall provisions are designed to ensure that all parties involved receive their appropriate share of payments, based on the hierarchy of their seniority and the nature of their claims.
The waterfall provisions in a credit agreement typically begin with the payment of senior secured lenders, who have first priority over other creditors. These lenders have a security interest in specific collateral pledged by the borrowing company, such as real estate, inventory or equipment. They are typically repaid first, before any other creditors.
Next in the waterfall are other creditors with secured claims, such as equipment lessors or landlords, who also have a security interest in specific assets or properties of the company. They are repaid after senior secured lenders and before unsecured creditors.
Unsecured creditors, on the other hand, have no specific security interest in any particular assets of the company. They are repaid after secured creditors, but before shareholders. Unsecured creditors may include providers of trade credit, vendors, suppliers, employees and others who have extended credit to the company but do not have a security interest in any particular asset.
Finally, shareholders are repaid last in the waterfall, after all other creditors have been paid. Shareholders are the owners of the company and have invested in it with the expectation of receiving a return on their investment. However, in the event of a default or bankruptcy, they typically have the lowest priority for payment, as they have not extended any credit to the company.
The waterfall provisions in a credit agreement are critical for ensuring that all parties involved understand their priority of payment in the event of a default or bankruptcy. This helps to reduce uncertainty and provides a clear framework for managing the insolvency process.
In conclusion, the waterfall in a credit agreement is an essential concept in finance that outlines the priority and sequence of payments to be made to investors or lenders in the event of a company`s default or bankruptcy. Understanding this concept is critical for anyone involved in the lending or investing process, as it ensures that all parties are aware of their rights and obligations in the event of insolvency.