An IPO also represents a major event for company and group financing arrangements. It is likely that amendments to existing financing arrangements are needed in connection with an IPO to allow the group to comply with both the requirements of its bank lenders and the new world of regulatory compliance. If an IPO is an option while the group is negotiating a new financing arrangement, it is often possible to agree on such amendments in advance, creating some certainty for the company and its owners. The more concrete the IPO plan, the easier to accommodate it in the financing agreements.
The starting point in leveraged structures at least i that a flotation triggers a mandatory prepayment of all facilities. An exception to the prepayment obligation for a "qualifying listing" is therefore required. The key to determining the qualifying listing is often the leverage level post-IPO. This usually requires the company to apply the IPO proceeds towards prepayment of the loans until the agreed leverage level is reached. From the lenders' perspective deleveraging the group brings the client profile closer to investment grade, allowing lenders to relax their terms. After the IPO, the previous main owner is usually given more flexibility to further reduce its shareholding. The change of control clause can even be "reversed" so that it is triggered if any third party acquires a sufficiently large number of shares.
In a leveraged structure lenders will ensure that they receive a constant stream of information from the group, including both historical and forward looking financial information. These standard information requirements are clearly incompatible with the principle of equal access to information that is ingrained in public markets. Typical amendments to the information undertakings therefore include the removal of requirements for forward-looking financial projections and budgets, as well as the alignment of timeframes for information delivery to correspond with the stock market disclosure timetable.
For the "equity story" of the company it is typically important for the company to pay out dividends, often severely restricted or altogether prohibited by the loan documentation. Finnish company law also allows a qualifying minority of shareholders to require a so-called minimum dividend, which could create a difficult situation for the company if its debt agreements prohibit dividends. Therefore in the case of an IPO the dividend restriction should either be removed altogether or relaxed to allow dividends up to an agreed level, usually calculated by reference to debt level or as a percentage of earnings. In the Finnish context it may be preferable to tie the dividends to earnings, as that is also how the minimum dividend is calculated.
In addition to these specific amendments aimed at achieving compatibility with the stock market, there are a number of clauses in a typical leveraged loan agreement which would not exist in an investment-grade document. Due to deleveraging of the borrower group, the borrower is often able to negotiate the contract to bring it closer to investment grade, at least to some extent. A reduction in margin to reflect the lower leverage will naturally be well-received, and may be achieved either by application of an already agreed margin ratchet or by amendment of the loan agreement.
Financial covenants are usually also re-negotiated, and cash flow cover and capex covenants often removed altogether. Testing periods may need to be re-set, although covenant testing is usually performed on a quarterly basis and is therefore already in line with stock market reporting schedules.
To allow more overall freedom for the borrower group, various operational covenants are often relaxed, e.g. by increasing the so-called permitted baskets. Similarly, lenders may be willing to reduce their requirements for security and guarantor coverage.
Given the relative inactivity in the Finnish IPO market in recent years, it is too early to say what will be accepted as the new market practice with regard to relaxing financing terms beyond the amendments required to achieve compatibility with the stock market environment.