As M&A practitioners who do deals in Europe as well as in the U.S. know, the certainty of banking commitments is stronger as a rule in Europe than in the U.S. So much so that, given the choice, it can be a factor in the decision whether to do the financing in Europe or in the U.S. If the seller is in Europe, European “certain funds” will usually be stipulated as a requirement in any sales process. Even if the seller is in the U.S., a bidder has been known to try to distinguish his bid by demonstrating a European level of banking certainty.
The background to this disparity in the strength of commitments, and what it means for sellers and buyers, is worth exploring.
The U.S. market has quite different documentation for banking transactions compared to the European market. That is partly because the laws are different, but that is only part of the story. It is mainly because the private equity banking market has evolved with different dynamics:
The European private equity market is relatively younger, having only really got motoring since the turn of the century when mainly-American private equity firms decided that they liked the look of the European market and started buying assets in Europe. Something of a feeding frenzy ensued.
Banking documentation is relatively more uniform in Europe than in the U.S., due to the widespread adoption across the European market of the UK’s Loan Market Association standard forms and practice guidance.
The way the European market has evolved, sellers of European businesses have had such a strong negotiating position that they have been able to demand extraordinarily strong terms as standard in their auction processes, including with respect to deal certainty.
The UK Takeover Code has long required bidders for public companies to demonstrate that they have “certain funding” for their bids. This had meant that in public deals any external funders (e.g. banks) are required to be committed to fund on a virtually condition-free basis. Due diligence conditions need to be satisfied, market and syndication conditions are not acceptable; even conditions by reference to the health of the target company cannot be included, unless in each case the conditions are clearly set out in the bid itself (not just in the banking documents). The banks do get a veto over material changes to the bid documents (but note that MAC conditions are rarely seen in European bid documents).
In the early years of this century private equity firms who were granted this level of commitment for their UK public deals succeeded in persuading their banks to also grant them this level of commitment in their private deals. Certainty of funds quickly became the standard in the UK and then, due to the dominance of the London banking market and the predominance of English law (and LMA forms) in European cross-border banking documentation, across Europe.
Note also that in English law there is no implied duty to negotiate in good faith, and so in European deals it is quite common for sellers to require bidders to have a fully negotiated loan agreement, rather than just a commitment letter and term sheet. This has resulted in the use of a short-term bridge loan agreement (called an Interim Loan Agreement) which is purely to demonstrate certainty of funding for the bid stage, and which will be replaced by long-term finance documents prior to closing of the deal.
What is the Position in the US?
Briefly, in the U.S. there is a less uniform practice, because law firms and banks adhere more loyally to their own standard forms than to a common form. However, market-practitioners do tend to accept limited conditionality upon closing, including so-called “SunGard provisions” (named after the deal in which this position was developed). MAC conditions, which are quite commonly seen in US financing bid documents (i.e., commitment papers), will typically be present in the banking documents, but under SunGard provisions they will be the same as the MAC conditions in the M&A Agreement (and will be governed by the same law).
Also, in some part because there is an implied duty to negotiate in good faith in U.S. law, it is relatively unusual in U.S. auctions to require a fully negotiated credit agreement. As a result, the bid will typically be more conditional than a typical European deal, but it should be noted that the differences on the purely banking side are more optical than substantive – the banks in a U.S. deal tend to be just as aligned with the borrower as they are in a European deal. Notwithstanding this, it would generally not be considered advisable for a bidder in a European auction to present a SunGard style financing arrangement. And from time to time bidders in U.S. deals have found that delivering European-style certain funds financing papers have given them an (optical) advantage, in that their bids might be considered more comparable to those of strategic bidders who have no financing need.