USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
only triggered when the revolver is drawn above a certain threshold. 3.2 Key Documentation Many middle-market and larger private credit trans - actions are being structured as unitranche deals with a payment waterfall included directly in the credit agreement itself. This removes the need for a sepa - rate agreement among lenders. Still, where a capital structure includes an unsecured mezzanine debt com - ponent, the senior secured facility and the mezzanine debt facility will be bound together by a subordina - tion agreement designed to restrict payments on the mezzanine debt (for the benefit of the senior secured facility). 3.3 Restrictions on Foreign Direct Lenders Foreign lenders may be subject to certain limitations that prevent them from leading deals or serving in the agency function. 3.4 Use of Proceeds and Acquisition Financings Using proceeds to acquire (or carry) margin stock is subject to certain limitations and restrictions. This applies if the direct or indirect security for the acquisi - tion financing consists of securities that are traded on an exchange in the United States, or “margin stock”. Such restrictions, often referred to as the “margin reg - ulations”, limit the amount of loans that can be collat - eralised by such securities. The US margin regulations can also be implicated by the existence of arrange - ments that constitute indirect security over margin stock, such as through negative pledge provisions or other arrangements that limit a borrower’s right to sell, pledge or otherwise dispose of margin stock. In addi - tion, borrowers and issuers are restricted from using proceeds in violation of applicable laws, including anti-money laundering, sanctions and anti-corruption laws, and such restrictions are usually included in the financing agreement. As a market convention, the use of proceeds for an acquisition financing is often limited by contract to the financing of the acquisition (including purchase price adjustments), the refinancing of existing indebt - edness and, to a limited extent, for initial working capi - tal. Acquisition financings rarely also permit additional
special dividends, but earnouts and appraisal rights are often funded with proceeds of acquisition financ - ings. 3.5 Debt Buyback Generally speaking, borrowers, and their sponsors, are contractually permitted to buy back term loans (but not revolving debt). The extent to which such pur - chases may be conducted is often limited to 25–30% of total outstanding term loans. Loan documentation (in both the syndicated and private credit market) has developed since the great financial crisis to permit non-pro-rata debt buybacks. All except the most lower-middle-market loan docu - mentation will include customary provisions permit - ting Dutch auction buybacks offered to all lenders. Many sponsors also insist on the ability to buy loans from lenders via “open market repurchases”, which may not expressly need to be offered to all lenders. Any analysis should be undertaken on a case-by-case basis. 3.6 Recent Legal and Commercial Developments Recent developments include: • Liability management transactions: Certain liabil- ity management exercises have impacted private credit transactions (eg, Pluralsight) and increased the focus of private credit lenders on capacity for investments in non-loan parties and in liability man - agement protections more generally. At this point, private credit lenders are increasingly assessing not only the presence of liability management protections but also the flavour of such protections included in debt documents. • Portability: While M&A and capital markets activity is on the upswing, the prior trough in deal activ - ity prompted an increasing number of sponsors to seek portability in the form of “permitted change of control” provisions. 3.7 Junior and Hybrid Capital The primary product for private credit providers remains the “unitranche” facility. However, private equity sponsors have also turned to private credit
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