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?
At the time of signing of the acquisition agreement, the potential purchaser will typically have executed a set of ‘commitment papers’ with its financing parties. The commitment papers will usually consist of:
- a commitment letter;
- a term sheet;
- a fee letter; and
- to the extent that a capital markets transaction is contemplated as part of the acquisition financing, an engagement letter and often a fee credit letter.
The principal final documentation will typically consist of:
- in the case of a bank financing, a credit agreement, a guarantee and security agreement;
- in the case of a securities financing, an indenture, notes evidencing the securities, a guarantee (if not included in the indenture) and, if secured, a security agreement; and
- where applicable, an intercreditor agreement and other security-related documents.
Full documentation is not required upon signing of the acquisition agreement and is generally not required until the closing of the acquisition. In certain cases, loan documentation may be executed prior to closing, either to be effective upon closing or to fund into escrow prior to closing, but it is far more common to sign and close on the same day (the date of the closing of the acquisition). In the case of securities financings, a purchaser may choose to consummate an offering prior to closing the acquisition and fund into escrow in order to take advantage of favourable market conditions.
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?
It is rare to see anything other than fully underwritten commitments in connection with acquisition financings for purchasers requiring debt financing to complete the acquisition, because sellers have become much more active in the financing process and thoroughly examine and evaluate the quality of a potential purchaser’s financing package. Sellers look for certainty in the financing and anything less than a fully underwritten commitment will negatively affect a purchaser’s overall bid in a competitive process.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
The conditions precedent to funding are some of the most important and negotiated provisions in commitment papers for an acquisition financing and there can be considerable variation in terms across different deals.
Some of the more typical conditions include:
- no business material adverse change;
- receipt of a minimum equity contribution;
- consummation of the acquisition pursuant to the terms of the acquisition agreement;
- no materially adverse modifications or consents to the acquisition agreement;
- receipt of historical audited and unaudited financial statements and of pro forma financial statements;
- completion of a marketing period;
- perfection of security interests;
- delivery of a customary offering document suitable for marketing any securities component of the financing;
- execution and delivery of documentation;
- payment of fees;
- receipt of information required by the US Patriot Act and other know-your-customer and anti-money laundering rules and regulations; and
- accuracy of certain representations made by the target in the acquisition agreement and other basic corporate and legal representations made by the borrower in the credit agreement.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Flex provisions are typically included in any set of acquisition financing commitment papers. Flex provisions permit the lenders to change certain negotiated terms in the term sheet to the extent necessary to ensure a ‘successful syndication’ (which term is negotiated and defined in the commitment papers) or if a successful syndication cannot be achieved. Similar to conditions precedent, market flex is one of the most important and highly negotiated provisions of commitment papers and, consequently, there is significant variation in terms (though the provision most commonly subject to the flex provisions is the pricing of the debt).
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
Yes. In the US market, the arrangers of any bridge financing typically have the right to force the borrower to issue permanent debt securities or, in limited cases, equity securities in lieu of funding all or a portion of the bridge facility at closing or to refinance all or a portion of the bridge facility after closing. The most common formulations of a securities demand will permit the issuance of such a demand at any time during the period commencing a few days prior to closing, provided that no securities are required to be issued before the closing date (however, requiring funding into escrow prior to closing is sometimes negotiated in situations where the commitment period may be longer than typical due to regulatory or other deal-specific circumstances), and ending on the first anniversary of the closing date.
There will typically be certain negotiated parameters with respect to the demands and the details of the issued securities including, among others:
- maximum number of demands;
- minimum issuance amount for each demand;
- maximum weighted average yield for all securities and often a maximum effective yield for any one tranche of securities;
- minimum tenor and maximum call protection for the securities; and
- form of offering of the securities (ie, SEC registered or private) and type of securities (eg, secured or guaranteed).
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?
The provisions in an acquisition agreement that are most relevant to lenders include:
- the definition of ‘material adverse effect’ or comparable term with respect to the target;
- the buyer’s representation that it has obtained requisite financing;
- the buyer’s covenant to obtain financing in accordance with the commitment papers;
- the seller’s covenant to cooperate with the buyer to obtain financing in accordance with the commitment papers;
- any provisions relating to a financing condition or the payment of break-up fees; and
- any provisions relating to the liability of lenders.
In addition, there may be several general representations and covenants that are relevant to the lenders either from a diligence perspective or from a practical perspective.
As a result of litigation that arose with respect to failed financings during the financial crisis, lenders generally insist on including language in acquisition agreements that:
- gives lenders the benefit of any cap on termination damages negotiated by the purchaser or otherwise limit their liability;
- designates New York as the exclusive jurisdiction for any actions against the lenders related to financing for an acquisition;
- requires buyer and seller to waive any right to a jury trial; and
- because lenders are not parties to the acquisition agreement, stipulates that lenders are third-party beneficiaries of each of the foregoing provisions.
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?
Issuers that are subject to the reporting obligations of the Exchange Act will typically file commitment letters and acquisition agreements for a transaction that an issuer believes is material. As a result, acquisition agreements for a ‘material’ transaction may be filed by either the buyer or seller and commitment papers may be filed by the buyer. Because it is possible that commitment letters would be publicly filed with the SEC, lenders are careful to keep sensitive pricing or interest rate details out of the commitment letter. The pricing or interest rate details are usually in a separate fee letter that an issuer may deem is not material and thus not required to be filed with the SEC.
Entering into a commitment letter for a material transaction is typically described in an 8-K filing shortly after entering into such agreement, but the commitment letter is not typically filed with the SEC until the issuer files its periodic report (either form 10-K or form 10-Q) for the applicable period in which the commitment letter was signed. An acquisition agreement that is deemed material is typically filed after entering into such agreement.