UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
3.8 Payment in Kind/Amortisation In private credit transactions, PIK facilities are com - mon, especially at the Holdco level, offering a “pay-if- you-want” option. Borrowers can choose to pay inter - est in cash or capitalise it, with discounts for cash payments, enhancing cash flow flexibility during peri - ods of financial constraint. Senior-level facilities are usually cash-pay, with an option to PIK interest for a set number of periods, applying a premium for deferred payments to com - pensate for increased risk. Amortisation is not typically required, with lenders pre - ferring bullet repayment at maturity. For incremental facilities, loan documents often require that additional debt should not be amortising unless existing lenders receive the same terms. 3.9 Call Protection Call protection is a key feature in private credit loans. Lenders will typically require a prepayment premium (“make-whole”) to compensate for the interest income lost due to early repayment. The structure of call pro - tection varies and lenders also agree to a declining premium schedule (eg, NC1, 101). The exact prepay - ment fee terms are a matter of commercial negotia - tion. While principal and fee payments are not subject to UK withholding tax, interest payments are generally subject to withholding tax of 20% under the current law (proposed to rise to 22% from 6 April 2027). Double Tax Treaty Exemption Private credit lenders often rely on an exemption under a double tax treaty (DTT) if no domestic exemption is available. The conditions of the DTT and tax authority requirements must be analysed to ensure compliance. For example, the benefit of a DTT can generally only be claimed by persons that are “residents” of one or both of the contracting states. A person is usually a “resident” of a contracting state if they are “liable to tax” in it by reason of domicile, residence, etc (Article 4. Tax Considerations 4.1 Withholding Tax
mezzanine financing, supplements senior debt with flexible terms, such as interest deferral or PIK interest, aiding cash flow management. Hybrid capital solu - tions, including convertible debt or preferred equity, offer tailored financing with potential capital apprecia - tion and reduced cash outflows. Preferred equity is attractive in high interest rate or financial distress situations as it offers fixed dividends, priority in liquidation and greater security than com - mon equity as well as higher returns than debt. Pre - ferred equity does not impose the same repayment obligations as debt, preserving cash flow and reduc - ing strain. It allows companies to raise capital without diluting common equity holders’ control, as it usually lacks voting rights. In high interest rate environments, it offers favourable terms compared to debt costs, and it aids recapitali - sation or restructuring in financial distress situations. Common Junior/Hybrid Debt Structures The common junior/hybrid debt structures are as fol - lows: • Holdco facility by private credit lenders with tradi - tional Opco-level structures (eg, syndicated loans or high-yield bonds); • junior/second lien facility by private credit lend - ers with senior financing from syndicated loans or high-yield bonds; and • preferred equity. Private credit lenders may also take equity shares (eg, common equity or warrants) along with provid - ing debt. Security Package Typically, enforcement for Holdco instruments is above the Holdco borrower, with security over shares and receivables granted by its immediate shareholder. Alternatively, enforcement may be below the Holdco borrower, with a holding company covenant to pre - vent leakage, involving a share and receivables pledge over the entity below and an account pledge from the Holdco borrower.
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