USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
applies to assignments in respect of term loans but not revolving facilities. Negative consent and stream- lined assignment processes are now common in most large, syndicated facilities, supporting liquidity and efficient secondary trading. In contrast, participations involve a transfer of limited lender’s rights, which traditionally are focused on the right to receive payments on the loan and the right to direct voting on a limited set of “sacred rights”. The transferee becomes a “participant” in the loan but does not become a lender under the loan docu- mentation and has no contractual privity with the bor- rower. Participations rarely require notice or borrower consent, but some borrowers have sought to include such requirements though lender resistance remains strong, and most agreements still provide broad flex- ibility for participations. There is also a notable trend toward more detailed and expansive “disqualified institution” lists in loan agreements, reflecting borrowers’ heightened focus on controlling the composition of their lender group. These lists generally include the borrower’s competi- tors, certain undesirable financial institutions (such as vulture and distressed funds) and increasingly, institutions identified for regulatory, reputational, or sanctions-related reasons. 3.7 Debt Buyback Borrowers and their affiliates (including private equity sponsors) are able to purchase loans in the US syndi- cated loan market, subject to customary requirements and restrictions. This practice remains prevalent, with borrowers and their affiliates continuing to use loan buy-backs as a tool for liability management, oppor- tunistic trading, and capital structure optimisation. In addition, private equity sponsors and their affili- ates (other than borrowers and their subsidiaries) are typically allowed to make “open-market” purchases of loans from their portfolio companies on a non-pro- rata basis. These “open-market” purchases are also receiving heightened scrutiny in the context of certain “uptiering” transactions, where “open-market” pur- chases are used to justify the non-pro rata purchase of loans in the context of exchanging existing debt for new, priming debt. However, a recent ruling by
the Fifth Circuit held that Serta’s 2020 uptier transac- tion was not a valid “open-market purchase” under its credit agreement. Once held by a borrower affiliate, these loans are normally subject to restrictions on (i) voting, (ii) participating in lender calls and meetings and (iii) receiving information provided solely to lend- ers. Loans held by private equity sponsors and their affili- ates are also subject to a cap of the aggregate prin- cipal amount of the applicable tranche of term loans, traditionally in the range of 25–30%. Bona fide debt fund affiliates of private equity sponsors that invest in loans and similar indebtedness in the ordinary course are usually excluded from these restrictions, but are still restricted from constituting more than 49.9% of votes in favour of amendments requiring the consent of the majority of lenders. There is also increased attention to the definition and scope of “debt fund affiliates” and the mechanics for tracking and enforcing these caps, as the lender base continues to diversify with the growth of private credit, insurance company, and asset manager participants. Loan documentation is also evolving to address the treatment of loan purchases by non-traditional inves- tors and to clarify the application of restrictions in the context of complex sponsor structures. 3.8 Public Acquisition Finance The USA does not have specific rules requiring “cer- tain funds” for acquisition financing. Instead, financing commitments for public and private company acquisi- tions are typically subject to limited “SunGard” condi- tions due to the absence of a financing condition in most acquisition agreements, which generally include: • accuracy of key “specified representations” about the financing’s enforceability and legality; • accuracy of certain material seller or target repre- sentations made in the acquisition agreement, the breach of which would cause a condition to not be satisfied or permit the buyer to terminate the acquisition; • no material adverse change to the target, matching the condition in the acquisition agreement; and • conditions relating to the timing required by arrang- ers to properly syndicate the loans in advance of
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