JAPAN Law and Practice Contributed by: Jiro Mikami, Ryo Okubo, Hiromi Hattori and Tomohiro Koyasu, Nagashima Ohno & Tsunematsu
times use their own form, incorporating some globally used terms (such as certain funds) into the Japanese-style form. When the target is based in a jurisdiction where the LMA forms are commonly used, such as the UK, the loan agree- ment is usually drafted based on the LMA form. 2.3 Language The controlling language of definitive agree- ments is usually Japanese. However, when glob- ally used forms are adopted, English is used as the controlling language (although the governing law is Japanese law). 2.4 Opinions Legal opinions are typically issued by the bor- rower’s counsel. Mandated lead arrangers gen- erally request the borrower’s counsel to cover: • corporate existence; • capacity and due authorisation; • legality, validity and enforceability of the loan- related documents; • valid and perfected security; and • choice of law and forum selection (in cross- border transactions). Senior loans are usually the only source of debt financing. However, in large or high-leverage transactions, mezzanine finance may be utilised in conjunction with senior loans. Senior loans typically comprise Term Loan A, Term Loan B and a revolver. Capital expenditure (capex) lines are only used occasionally. Term Loan A is fully amortised, while Term Loan B is paid in a lump sum at maturity. Term Loan A and Term Loan B are used to finance the closing of 3. Structures 3.1 Senior Loans
the acquisition, refinancing and the transaction costs, while the revolver is used to finance work- ing capital. The tenor is typically seven years but may be shorter in some cases. Financial cov- enants typically include: • leverage ratio; • debt service coverage ratio; An unusual feature of the syndication market is that investors typically participate in all tranches on a pro rata basis, although this may change in the future. Credit ratings for acquisition finance loans by rating agencies are not yet common in Japan. Senior loans are secured by a security package. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans Mezzanine financing is provided by way of non- voting preferred shares or subordinated loans. Subordinated loans have become more com- mon in recent years. • minimum net worth; • positive income; and • maximum capex. The preferred shares used for acquisition financ- ing are usually non-voting, cumulative and non- participating shares, as mezzanine investors seek to secure the agreed spread. In addition, to ensure the mezzanine financier’s position is secured, conversion rights to the voting shares are usually attached to the preferred shares so that the financier can exercise the conver- sion right and seize control of the company in the event of financial distress. It is common for redemption rights to be granted to the mezza- nine financier to secure its exit.
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