Debt commitment letters and acquisition agreements
Types of documentation
What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?
Except for smaller deals where specific French law and French language precedents are used, credit agreements and intercreditor agreements will generally follow the format of the latest English law LMA form for leveraged finance transactions.
For a transaction featuring bond debt governed by French law, a subscription agreement and terms and conditions to be adopted by the relevant issuer’s corporate body will be used instead of a credit agreement and the intercreditor will require significant modifications, in each case to take into account the French specificities in terms of bond regulation.
When the acquisition structure involves a super senior revolving facility and a high-yield bond, the French market will also use the corresponding English law LMA forms and the usual New York law governed high-yield documentation (as adapted to reflect certain of the French specificities in terms of bond regulation).
For acquisitions of private companies, a commitment letter attaching either a short-form or a detailed (depending on how firm or finalised the offer shall appear) long-form term sheet is generally used. On some transactions the arrangers will also commit to enter into an ‘interim facility’ agreement attached to the commitment letter. The interim facility agreement includes provisions for a facility that matures within a short period of time after closing, which is available to fund the acquisition at closing. For transactions involving private equity houses, commitment papers will often follow papers for past transactions completed by that house.
For acquisitions of public companies, a fully negotiated and executed credit agreement and other ancillary financing documentation (including counter-guarantee mechanisms), as further described in question 4, are generally required by the sponsor bank to be in place before the offer is made.
Level of commitment
What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?
Acquisition debt lenders are normally not party to the acquisition agreement and their degree of commitment is solely a matter of commitment letters. Leveraged acquisition finance most generally features full underwriting commitments with a view to syndicate a portion of, or fully distribute, the debt either before or after completion. However, smaller transactions may feature club deal arrangements with no particular syndication strategy. Best effort commitments are rarely seen in acquisition finance because they generate a high level of uncertainty on the future availability of the financing, but are more often used for refinancing transactions.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
Conditions precedent contained in the commitment letter will generally depend on the strength of the certain fund basis of the offer and of the underlying business as well as the duration of the commitment and may (or may not), therefore, include material adverse change clauses or specific financial conditions, or both in addition to usual conditions precedent to funding such as:
- corporate formalities for all borrowers and guarantors (eg, board and shareholder resolutions, constitutional documents and specimen signatures and certificates certifying no breach of borrowing or grant of guarantee or security limitations);
- executed finance documents (eg, the facility agreements, security documentation, intercreditor agreement and fee letters);
- notices and any other relevant documentation under the security documentation;
- an executed acquisition agreement;
- details of insurance policies in place;
- copies of due diligence reports, including a tax structure memorandum and reliance letters in respect thereof;
- financial projections;
- financial statements;
- a closing funds flow statement;
- a group structure chart;
- know-your-customer requirements;
- evidence that fees and expenses have been paid;
- evidence that existing debt will be refinanced and security released on closing; and
- legal opinions.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Market flex provisions are usually included for financing to be syndicated to other lenders in the market. Such provisions may permit arrangers to:
- increase the margin and fees;
- move debt between tranches under the same agreement or create or increase the amount of a subordinated facility;
- remove unusual provisions; or
- tighten other provisions if this appears necessary or desirable to ensure that the original lenders can sell down to their targeted hold levels in the facilities.
Market flex is often documented in a separate letter so it does not have to be disclosed to potential participants alongside the commitment letter and financing term sheet.
Additionally, in the past few years, in the context of a sponsor-friendly market, certain deals (mid-market and large-market transactions) have been subject to reverse flex provision (on pricing).
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
Securities demands are typically included in commitment letters or fee letters where lenders are providing a bridge facility that is designed to be refinanced as soon as possible thereafter with the proceeds of a bond offering. The terms of the securities demands will provide that the lenders may force the borrower to issue securities, subject to certain agreed criteria. The negotiation may centre around how often the demand may be made, whether the issuance must be for a minimum principal amount of notes (to ensure some level of efficiency for the issuer in terms of transaction costs and management time), the maximum interest rate at which the issuer can be forced to issue the notes and the terms of the notes (eg, currencies and maturity).
Key terms for lenders
What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?
For acquisitions of private companies, lenders will wish to benefit from any business material adverse change clause that a buyer negotiates in the acquisition agreement for the target, but generally will not require these provisions to be replicated in the commitment letter or the credit agreement, which will provide instead that the conditions to the acquisition are satisfied and not waived. The lenders will require controls on the ability of the purchaser to amend or waive certain provisions of the acquisition agreement, such as the long stop date, price, conditions to closing, termination rights or, where applicable, warranty provisions.
The lenders will generally require security over the contractual rights contained in the acquisition agreement that enable the purchaser to seek recourse against the vendor and also that the acquisition agreement can be disclosed to the lenders. The ‘drop dead date’ for completing the acquisition should match the availability period for the financing.
Public filing of commitment papers
Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?
There is no general requirement that commitment or finance documents be publicly filed in connection with acquisitions of private companies. Conditions are different with respect to public acquisitions that are to be funded through debt arrangements, because both article 231-18 2°(g) of the General Regulations of the Financial Markets Authority (AMF) relating to corporate takeovers, and the AMF’s instruction No. 2006-07, adopted by the AMF to implement the former, require that the offer document prepared by the offeror must be filed with the AMF and must describe ‘the terms of the proposed financing, and the potential impact of such terms on the assets, business and financial performance of the involved entities’. From a legal perspective, the usual practice is to disclose the quantum and types of financings that are proposed in connection with the transaction, their main financial terms and the guarantee and security arrangements that are to be implemented. Where members of the target group are to become borrowers, details of the proposed terms should also encompass those financings that are proposed to be made available to them.
Bond terms and conditions are generally approved by the shareholders of the issuer and an appendix replicating the whole set of contractual and financial terms applicable to the bonds is normally attached to the minutes of the relevant shareholders’ meeting. As such, the terms and conditions of the bonds will be filed with the commercial court having jurisdiction over the issuer’s registered office and may be publicly available to some extent.