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?
In most cases, debt commitments are governed by foreign laws. Legal techniques and the sequence of documentation prevailing in Anglo-Saxon legal practices are customarily used in Luxembourg. There is, therefore, no standard practice in Luxembourg, and the full set of documents would be familiar to Anglo-Saxon investors.
In the initial steps towards the transaction, acquisition finance documents will usually include a letter of intent, a commitment letter issued by the bank or financing parties, or both, a term-sheet, a fee letter and, to the extent a capital markets transaction is involved in the acquisition financing, an engagement letter and often a fee credit letter. The closing documentation will typically include a credit facility agreement, with the financing banks or loan agreements with financing parties, whether subordinated or not, and various finance documents that would comprise a ‘security package’ including:
- pledge over receivables;
- pledge over shares;
- pledges over bank accounts and other charges on movable and immovable assets with forms of all required notices to be sent under the security documents;
- any hedging arrangements;
- subordination agreements and intercreditor agreements;
- equity documents; and
- utilisation requests.
English concepts of debenture are not used in Luxembourg in as much as this type of general security is unlikely to be enforceable under Luxembourg law.
Apart from the commitment letter and letter of intent, the documentation is contemporaneously signed on the day of the closing of the acquisition. Signing in counterparts has now become a common practice in Luxembourg and exchange of executed documentation by fax and electronic copy (with originals to be provided later on) is validly recognised. Luxembourg law requires, however, that the same number of original agreements be signed as the number of parties to the agreements involved in the transaction.
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?
Best efforts commitments remain unusual. Transactions are carried out in Luxembourg when the acquisition deal has been secured through fully underwritten commitments in connection with acquisition financing. Luxembourg, being mainly a platform elected for its ‘tax appeal’, as a secured creditor-friendly jurisdiction and ease of public quotation and pragmatic contractual enforcement, is a jurisdiction resorted to by parties when the deal is nearly completed and all financing details have been resolved. Because closing occurs when financing is secured, it is unusual to negotiate a transaction in Luxembourg whose financing remains uncertain. Good faith in negotiations also remains a requirement and any negotiator may be liable in tort if he or she acted in bad faith in the pre-contractual phase of negotiations without any intent to commit him or herself.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
The conditions precedent list may have a variable perimeter according to the bargaining power and existing trust of parties. Some of the more frequent typical conditions are:
- due diligence: legal and financing (including audited and unaudited financial statements and of pro forma financial statements);
- review of good standing of corporate borrower;
- report on title (real estate);
- tax clearance on the acquisition structure and structure memorandum;
- corporate conditions precedent: existence, authorisation, capacity to enter into the contractual documentation including directors’ and managers’ certificates and in some recent cases solvency certificates issued by the Chief Financial Officer of borrowers;
- funds-flow statement;
- legal opinions from counsel on borrower or target, or both;
- no business material adverse change;
- consummation of the acquisition pursuant to the acquisition agreement;
- completion of marketing period and receipt of customary syndication or disclosure information;
- execution and delivery of documentation;
- perfection of security interests;
- delivery of an offering document suitable for marketing any securities;
- payment of fees;
- receipt of know-your-customer and anti-money laundering rules and regulations; and
- the accuracy of certain acquisition agreement representations made by the target as well as other basic corporate and legal representations made by the borrower in the credit agreement.
Representations are generally repeated at each new drawdown.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
Luxembourg banking and financial institutions are not geared towards large financing or syndications. In addition, they tend to focus their strategy more on private banking activities than on investment banking or commercial credit. Most of the financing operations are carried out by European branches of US or UK banks, or UK branches of French or German financial institutions. Each of them tends to deal according to their national market practices.
Flex provisions have been increasingly predominant in the post-leveraged buyout (LBO) boom and continue to be a key protection for arrangers. The arrangers negotiate the authority to modify the terms of the committed debt, including rights to reallocate the debt among tranches or to allocate a portion of the committed amount to newly created tranches or subordinated facilities. In addition, financings include pricing flex at levels substantially higher than expected market-clearing prices and impose additional adjustments for changes in market indices. Other provisions include excess cash flow sweep (increase in percentage subject to sweep) or increase of financing ceilings.
Some observers also comment that arrangers continue to be ‘reluctant to underwrite particular covenant levels and definitions or sponsors’ forms of documents’.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
Arrangers have the right to require the borrower to replace the bridge loan with a permanent financing package. Bridge financing would ordinarily finance initial capital expenditure investments.
Bridge financing can also frequently be secured by the issuance of free warrants entitled to acquire equity interests or other debt-equity instruments. Demands to place pre-closing securities in escrow before financing are not frequent, owing to corporate law constraints on the ease to proceed to the issuance of securities in advance or on demand.
The terms and conditions of the securities would usually be those prevailing in the markets in which the syndicated banks compete for financing. Terms of securities would be negotiated on a case-by-case basis and include various features such as secured against unsecured, quoted or non-quoted with a maximum number of demands for securities with a minimum issuance amount for each call. Financing conditions would also set the weighted average yield for all securities to be issued irrespective of their tranches and time of issuance.
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?
Foreign acquirers or lenders want to ensure that most of the contractual provisions protecting their rights, subject to foreign law, will be fully enforceable in Luxembourg against the Luxembourg special purpose vehicle (SPV). Much care would be addressed to representations relating to valid corporate authority and the binding effects of the contractual agreements. Lenders will rely heavily on local counsel to obtain confirmation, under a formal legal opinion, of the validity and compatibility of contractual provisions with Luxembourg law: validity and enforceability of a non-recourse clause, upstream guarantee or subordination provisions will be heavily scrutinised and security packages would be fiercely negotiated. In particular, provisions entitling the enforcement of loan agreements in distressed situations would be key in the Luxembourg negotiations with the view to enabling lenders to recover their investments in insolvency situations.
In addition, lenders will be sensitive to any tax frictions that the use of a Luxembourg SPV could generate. Specific representations and covenants will be negotiated to this effect and assurance that tax treatment of the financing and acquisition operations has been secured remains paramount.
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?
No filing requirements apply to commitment letters, and acquisition agreements remain private and are protected by the law on privacy.