JAPAN Trends and Developments Contributed by: Satoshi Inoue, Yuki Kohmaru, Hikaru Naganuma and Masahiro Yamamoto, Anderson Mori & Tomotsune
or a trade sale of shares in the target (including its management companies). In this regard, an overseas shareholding vehicle, such as a limited partnership organised in the Cayman Islands, is often designated as the borrowing entity of the holdco mezzanine loans. These holdco mezzanine loans are structur- ally subordinated to senior loans, meaning no intercreditor agreement is generally required between senior lenders and holdco mezzanine lenders unless no guarantee or security interest over senior borrower or target group companies is provided in favour of the holdco mezzanine lenders. While the structure of holdco mezza- nine loans varies depending on the time at which the holdco mezzanine loans are obtained, it is often the case that no security interest is taken over shares in the holdco mezzanine lenders, in order to avoid any conflict with security inter- ests in favour of senior lenders. In some transac- tions, holdco mezzanine lenders have the right to require a borrower to dispose of its shares in the senior borrower upon the occurrence of an event of default, to the extent that the exercise of the mandatory disposal right does not conflict with the interest of the senior lenders. Adoption of Loan Market Association-Based Facility Terms Overview In the Japanese market, a substantial part of acquisition finance transactions is documented based on the standard forms of facility agree- ments published by the Japan Syndication and Loan Trading Association (the “JSLA” ). Compared to the global form of the facility agreement (including the model form provided by the Loan Market Association (the “LMA” )), traditional forms of facility agreements in Japan require negative undertakings on the part of a
borrower more generally, without default carve out provisions. This allows for a broader range of authority and discretion on the part of lend- ers in their decision-making on loan disburse- ment and waiver of contractual breaches. For example, leading arranger banks in Japan tend to hold a substantial portion (30% to 40% and sometimes more) of the loan facilities even after syndication. These leading arrangers often also take on the roles of facility agent and main bank of the tar- get group (ie, the role of relationship bank) and are generally amenable to approving exemp- tions and waivers of non-material contractual breaches. In recent years, with the increase in inbound investments by global PE funds, sponsors often request facility agreements be based on the LMA template or to incorporate borrower- friendly terms commonly adopted in the global acquisition finance market. Certain funds provision One of the most heavily negotiated provisions in loan documentation is the conditions precedent provision for loan disbursement. In Japanese acquisition finance transactions, the conditions precedent typically includes, among others: • absence of any breach by the borrower and target group companies of the relevant finance documents, including related under- takings; • absence of any event of default; • absence of any material adverse change in the assets, financial condition, business or prospects of the target group companies (the “Target MAC” ) and
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