UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
ments and dealing with insurance contracts. There are also “change in control” requirements for investing in entities in “regulated activities”. Under Section 21 of the FSMA, only authorised per - sons can communicate an invitation or inducement to engage in an “investment activity” (a “financial promo - tion”) in the course of business. Unauthorised persons can communicate a “financial promotion” if approved by an authorised person. Corporate lending is not a regulated activity in the UK, unlike lending to individuals or certain partnerships, which may fall under the UK consumer credit regime. Corporate lending is subject to UK AML requirements. The UK does not differentiate between the regulatory treatment of term and RCF loans and has no general restrictions on the sale, transfer or sub-participation of loans. 3.4 Use of Proceeds and Acquisition Financings There are no restrictions on using private credit for take-privates and acquisition financing and no restric - tions on a borrower’s use of proceeds under English law. 3.5 Debt Buyback Debt buybacks by borrowers are permitted under English law and facility agreements will typically include provisions governing this. There are usually three options. • Open order transactions – The borrower noti - fies the lenders of the total amount of the loans it intends to acquire and the price offered. If the offer is oversubscribed, offers from the lenders are accepted on a pro rata basis. • Solicitation transactions – The borrower solicits offers from lenders to purchase its debt, select - ing the lowest offers first and, where offers are at the same price, purchasing the debt on a pro rata basis. • Bilateral transactions – This involves a direct nego - tiation between the borrower and a single lender. The parties are free to agree the terms. This option is often used when the buyer and seller have a pre-
existing relationship or when confidentiality and discretion are important. Private credit lenders will often require that the open order process is completed first before there is a solic - itation or bilateral process. 3.6 Recent Legal and Commercial Developments Similar to the broadly syndicated market, private cred - it lenders are focused on limiting the “trap doors”/ loopholes in covenants that might allow for sponsors/ borrowers to undertake liability management exercis - es (ie, uptiering transactions or dropdown/asset-strip - ping transactions). This has led to the development of a few “blockers” – ie, contractual protections to prevent the borrower group/sponsor from undertaking these transactions. Key “blockers” that are now included in private credit transactions are as follows. • preventing key assets being transferred to unre - stricted subsidiaries, which could use them as collateral for new, senior debt; • ensuring key assets remain with guarantors, limit - ing transfers to non-guarantor restricted subsidiar - ies by imposing caps; • capping the aggregate value of assets moved to unrestricted subsidiaries; • stopping majority lenders from subordinating existing lenders’ security/introducing priming debt without unanimous consent; and • preventing automatic release of a subsidiary guar - antor’s guarantee if it becomes non-wholly owned through permitted transactions. It is expected that such blockers may continue to develop given the proliferation of liability management transactions, particularly where there are instances of
so-called lender-on-lender violence. 3.7 Junior and Hybrid Capital
In the current high interest rate environment, many sound businesses face increased debt service and reduced senior debt capacity. Junior and hybrid cap - ital solutions help alleviate these pressures. Junior capital, which typically includes subordinated debt or
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