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?

Acquisition financing agreements are usually based on standard documentation published by the Loan Market Association (LMA). The LMA also publishes documents governed by German law.

For acquisitions of private companies, a commitment letter attaching a detailed long-form term sheet is generally used as a starting point while full documentation is being prepared in the background. In certain transactions, the commitment documents also contain an ‘interim facilities’ agreement. Such interim facilities agreements aim to provide a fall-back to ensure certainty of funding while full documentation is still being prepared and negotiated. However, in almost all cases, the interim facilities agreement is neither signed nor used for funding, as the parties usually agree on a long-form credit agreement before the acquisition is closed.

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?

Commitment letters for acquisition financings usually provide for underwritten debt. This is particularly true in auction processes, where bids are typically supported by fully underwritten debt. Best efforts commitments are more usual for refinancing transactions or in the context of the issuance of high-yield bonds (which is typically combined with an underwritten bridge loan).

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 generally depend on the certain funds basis required for the offer as well as the duration of the commitment. The conditions are usually quite limited and comprise, inter alia, the execution of final documentation within a certain period of time, the granting of the agreed security interests, the injection of the equity portion and shareholder loans and the absence of a major default (ie, a default resulting from the breach of certain particularly important representations and undertakings relating to the actions or omissions of the acquiring group companies (and not the target group)). In a typical acquisition financing, lenders are provided with draft due diligence reports, a draft acquisition agreement and all required KYC documents prior to signing the commitment documents.

Flex provisions

Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?

Banks often ask for market flex clauses, allowing them to modify the agreed terms of the loan unilaterally if syndication turns out to be more difficult than expected. Such flex usually permits arrangers to increase the margin, original issue discounts or upfront fees, as well as to reduce the size of certain baskets or to delete growers or make other changes to the financing structure, pricing and financial maintenance covenants (if any).

Securities demands

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 sometimes seen in acquisition financings in Germany, depending on the then current market conditions and size of the bridge loan. Alternatively, bridge facility agreements often provide for factual requirements (such as the short maturity) or incentives (such as significant margin step ups after the lapse of a certain period of time) to refinance the bridge facility by means of securities or a term loan B (TLB).

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?

Lenders usually focus on the payment mechanics (eg, agreements on deferred purchase prices or deposits, if any), the purchase price formula (eg, locked box or closing accounts), the closing conditions and procedures, the long stop date, the termination rights, the representations and warranties and any vendor rights surviving closing (including vendor financing). Lenders usually require control over the purchaser’s ability to amend or waive the related provisions of the acquisition agreement.

Further, lenders usually require that the purchaser’s rights under the acquisition agreement can be assigned to the lenders. In addition, purchasers are often required to ensure that the acquisition agreement requires the seller and the target to cooperate in the syndication process and that the agreement as well as any related documents can be disclosed to the lenders and potential assignees or transferees.

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?

In the context of acquisitions of private companies, there is no requirement to file commitment letters or acquisition agreements. In the context of a public takeover offer, the relevant offer document must be published. In addition, if the relevant offer provides for a cash payment as consideration, an investment services enterprise that is independent of the offeror must confirm in writing that the offeror has taken the steps necessary to ensure that the means required to perform the offer in full are available at the time at which the claim for cash payment falls due. However, this does not require that the relevant commitment letter is publicly filed.