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 forms. For acquisitions of private companies, a commitment letter attaching a detailed long-form term sheet is commonly used. On some transactions arrangers will also commit to enter into an interim facility agreement attached to the commitment letter, which includes provisions for a facility that matures within a short period of time after closing and which is available to fund the acquisition at closing in order to reduce execution risk. In cases where an interim facility agreement is signed, a long-form credit agreement is, nevertheless, usually agreed before the share purchase agreement is entered into to fund the acquisition. For transactions involving certain private equity sponsors, commitment papers and credit agreements will often follow documentation for past transactions completed by that house.
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 the Takeover Code (see questions 4 and 29).
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 or refinancings. A bid for an acquisition is usually supported by a fully underwritten commitment letter.
Regulators on both sides of the Atlantic have tried to reduce systemic risk and persuade lenders into upholding credit standards by limiting loans that are seen as too risky. The ECB’s Guidance on Leveraged Transactions (which entered into force on 16 November 2017) is similar to the US Interagency Guidance on Leveraged Lending (which has been applicable to US-regulated banks since 2013, albeit with diminished status since a successful challenge that it was invalidly promulgated as a rule). The ECB’s Guidance applies to all ‘significant credit institutions’ in the eurozone supervised by the ECB and provides that underwriting loans where the ratio of total debt to EBITDA exceeds six times should be ‘exceptional’. Both sets of guidance recommend that banks should ensure that borrowers can repay at least 50 per cent of debt over a period of five to seven years. It is interesting to note that even before the legal challenge to the status of the US Guidance, they had had little impact on deal leverage ratios or the proportion of deals in excess of 6×. Just over a year on from the ECB’s Guidance coming into force, recent figures also suggest that, as in the US, they have had little real impact on deal leverage ratios or quality of deal terms in Europe.
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 funds basis of the offer and of the underlying business as well as the duration of the commitment. They may include material adverse change clauses or specific financing conditions, or both, but generally do not. Conditions precedent to funding generally include:
- corporate formalities for all borrowers and guarantors (eg, board and shareholder resolutions, constitutional documents, specimen signatures and certificates certifying no breach of limitations relating to borrowing, the grant of guarantees or security);
- 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;
- copies of due diligence reports, including a tax structure memorandum and relevant reliance letters;
- financial projections;
- financial statements;
- a closing funds flow statement;
- proof that an agent for service of process has been appointed (if there is no English company in the group);
- 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 in fee letters for financing to be syndicated to other lenders in the market. Such provisions may permit arrangers to increase the margin, fees or original issue discount (OID), 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 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 demand will provide that the lenders may force the borrower to issue securities, subject to certain agreed criteria. The negotiation may centre around when and 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. Business material adverse change conditions are not as common in the UK as in some other jurisdictions. The lenders will require controls on the ability of the purchaser to amend or waive certain material provisions of the acquisition agreement, such as the long stop date, price and the conditions to closing or termination rights.
The lenders will require security over the purchaser’s contractual rights contained in the acquisition agreement to seek recourse against the vendor. The ‘drop dead date’ for completing the acquisition should reflect the availability period for the financing. Financing agreements for the acquisition of public companies will impose restrictions on the conduct of the offer or scheme, such as the level of acceptances a bidder must obtain before declaring the bid unconditional.
‘Xerox’ provisions, limiting the liability of lenders for failure to fund, may occasionally be seen where US parties are involved. Provisions requiring the target to cooperate with a take-out financing are usual where a take-out debt issuance is proposed.
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 file in respect of acquisitions of private companies. In relation to takeovers of public companies subject to the UK Takeover Code, the offer document must describe how the offer will be financed, including details of:
- the amount of each facility or instrument;
- the repayment terms;
- interest rates, including any step up or other variation provided for (which may, subject to any grace periods granted by the Panel on Takeovers and Mergers (Panel), require market flex provisions contained in syndication letters to be disclosed);
- any security provided;
- a summary of the key covenants;
- the names of the principal financing banks; and
- if applicable, details of the time by which the offeror will be required to refinance the acquisition facilities and of the consequences of its not doing so by that time.
In addition, unless the Panel has granted a dispensation from doing so, copies of any documents relating to the financing of the offer must be published on a website by no later than 12 pm on the business day following a bidder’s announcement of a firm intention to make an offer (or, if later, the date of the relevant document) until the end of the offer (including any related competition reference period). Subsequent amendments or updates to these documents must also be published during this period, with specific processes outlined in Rule 27 for announcing material changes and subsequent documents.
The Takeover Code Committee has indicated that these disclosure rules may be waived in relation to certain details of the financing. These include headroom elements (where the bidder has agreed a potential increase in its facility with its financing bank) and details of the structures for providing equity to private equity vehicles (meaning that the leverage within such funds does not need to be disclosed). In a small number of cases, the Panel has consented to the bidder redacting market flex arrangements from the financing documents, thereby providing the lead arrangers with an opportunity to syndicate the debt in the period of up to 28 days following the announcement before the offeror is required to publish its offer document. The terms upon which the debt for an offer is being provided must be described in the offer document, and the final form of the financing documents must be published on a website. If syndication has occurred prior to issue of the offer document, the market flex arrangements will no longer be relevant and need not be disclosed. However, if syndication has not occurred by the date the offer document is published, the market flex terms will need to be disclosed in the offer document.