It is quite common that an existing credit facility has to be paid out in connection with the completion of an M&A transaction, as a result of, for example, a new credit facility being put in place to finance the acquisition which replaces the purchaser’s existing credit facility, or as a  result of both the purchaser and the target having separate credit facilities in place prior to the transaction, only one of which will be required going forward.

The process of paying out an existing credit facility should be quite straightforward as long as proper consideration is paid to the following five items:

  1. Payout letter – A payout letter should be obtained from the lender being paid out (or in the case of a syndicated credit facility, from the agent on behalf of the lender).  The payout letter should at a minimum state that, upon receipt of a specific payout amount (including applicable per diem amounts should closing be delayed) set out in the letter, the credit facility is repaid in full, and all guarantees and security are released.  If the credit facility being paid out includes a revolving facility (and especially a swingline facility), the final payout amount may not be available until the day of payout given the possibility of daily fluctuations, in which case you will need to ensure to follow up with the lender being paid out for the amount on the date of repayment.
  2. Letters of credit – Letters of credit issued under the existing credit facility will need to either be cancelled and re-issued to the beneficiary under the new facility, deemed to be issued under the new facility (if the prior lender is the same as the new lender or if it is a part of the syndicate of new lenders), cash collateralized (this is the more common approach where the prior lender is not part of the new credit facility, as it avoids the hassle of obtaining back the original letters of credit) or back-stopped by back-to-back letters of credit.  If letters of credit are to be cash collateralized, additional security documentation may be required and some of the security registrations will need to stay in place (with a more limited collateral description).
  3. Bankers’ acceptances – Advances by way of bankers’ acceptances cannot be repaid prior to their maturity, and as a result any outstanding bankers’ acceptances at the time of the payout will need to be cash collateralized by the borrower (triggering the requirement to deliver additional security and maintain existing registrations in place as described above).  To avoid this issue, if you are expecting to pay out credit facilities, you should consider converting bankers’ acceptances borrowings to prime borrowings as they mature prior to the date the credit facilities are to be repaid.
  4. Discharges of security – While security discharges will not be filed until the payout amount has been received, some discharge documents, such as for example real property discharges, require the signature of the lender that is being repaid and therefore it is preferable that such documentation be signed and delivered in escrow for closing of the M&A transaction so that you do not have to approach the lender again for these after it has been paid out.
  5. Return of pledged collateral – You should ensure that all share certificates and other original collateral pledged to the lenders is returned on payout of the credit facilities.  It is quite likely that such collateral will need to be pledged immediately to any new lender on closing.  In addition, any notes issued to lenders evidencing the loan should be returned on payout of the facilities, so that they can be cancelled.

Lenders which are to be paid out at closing should be approached early on in the transaction to avoid timing issues.  If this is done and the points above are considered in advance of closing, the payout process should then proceed quite smoothly at closing of the deal, permitting the parties to focus on the more substantive and important points of the M&A transaction instead of dealing with last minute hitches relating to a payout of credit facilities.