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?
Credit agreements and intercreditor agreements will generally be based on the latest LMA English law forms. However, it is usually necessary to tweak parts of the documents in order to deal with specific Italian-law related issues when the documents are governed by English law and the borrower is an Italian company. If the documents are to be governed by Italian law, some parts of the LMA forms will need redrafting to comply with Italian law.
For acquisitions of private companies, a commitment letter attaching a detailed long-form term sheet is generally used.
For acquisitions of public companies, a fully negotiated and executed credit agreement and other ancillary financing documentation would be required to be in place at the time the offer is made in order to satisfy the certain funds requirements of article 37-bis of related regulation issued by CONSOB (see question 4).
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 usually provide for underwritten debt or for a club of lenders to provide financing. Best efforts commitments are sometimes provided for bond transactions. Where the purpose of the bond issuance is to fund an acquisition, the best effort bond commitment could be backed up by an underwritten commitment to provide bridge bank facilities if certainty of funds is required to complete the acquisition.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
Conditions precedent to funding generally include:
- corporate formalities for all borrowers and guarantors (eg, board resolutions, constitutional documents and certificate of incorporation by the relevant companies’ registry, 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 together with certification that all conditions precedent thereunder have been satisfied;
- details of insurance;
- 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 sometimes included for financing to be syndicated to other lenders in the international market, particularly for larger deals. When included, 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 borrower-friendly provisions or tighten others 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 the fee letter for confidentiality reasons.
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 a very unusual feature in Italy. However, the use of this feature may potentially increase in the future, in relation to acquisitions funded through bonds, in situations where funding is initially secured by backstop short-term bank facilities, which ensure certainty of funds for completion of the acquisition in a timely fashion.
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 and the conditions of closing or termination rights.
The lenders will 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 generally no requirement to make commitment letters and acquisition agreements public in respect of acquisitions of private companies or public companies. However, in relation to acquisitions of public companies, commitment letters and acquisition agreements are filed with CONSOB and described in the tender offer document.