SOUTH AFRICA Law and Practice Contributed by: Ulrike Naumann, Alison Mellon, Joshua Janks and Aneria Bouwer, Bowmans
3. Structures 3.1 Senior Loans
lar choice for acquisition funders because of the favourable tax treatment of preference shares where the purpose of the funding is to acquire equity in an operating company. PIK loans or notes are not common. If used, they are often governed by the laws of another juris- diction. It is also expected that any PIK loans or notes are structurally subordinated in the group structure of the borrowing group. 3.3 Bridge Loans Bridge facility loans are frequently used in South African acquisition finance transactions, both corporate and leveraged acquisitions, as short-term financing to allow for the acquisi- tion transaction to be completed. These loans are made available for a limited period and may even be given as intraday loans. The tenor of bridge loans does not normally extend beyond 12 months. The bridge loan is refinanced on or shortly after the implementation of the acquisi- tion finance transaction, usually through the pro- High-yield bonds are not commonly used in South Africa for cross-border acquisition financ- ing transactions, largely due to the high cost and inherent currency risk where the bond is issued in another currency. Domestic secured bond and high-yield bond structures are seldom used for domestic acquisition financing transactions. 3.5 Private Placements/Loan Notes As with PIK loans and notes, loan notes are not commonly used in South African acquisi- tion transactions. However, transactions where a South African company is acquiring a target incorporated in another jurisdiction may involve the provision of loan notes governed by the laws of another jurisdiction. vision of the senior long-term debt. 3.4 Bonds/High-Yield Bonds
The exact structure of the financing arrange- ments will depend on the purchaser, creditors involved and target group. Senior lenders usually comprise South African commercial and invest- ment banks. Leveraged acquisition finance transactions involve a combination of debt and equity financing. The debt financing is usually made available directly to a newly incorporated company or acquisition vehicle, which uses it to acquire the target company. Aside from the acquisition vehicle, the senior debt may also be made available to the target in order for the tar- get to refinance existing debt and for working capital purposes. The target group is expected to provide security and may be required to enter into hedging arrangements. The senior lenders establish their priority by ensuring that other creditors lend to a target group company at a higher level in the group structure (ie, by structural subordination). The senior lenders also rely on protections provided in an intercreditor agreement with other creditors (see 4.1 Typical Elements ). In South Africa, as in other jurisdictions, corpo- rate acquisition transactions are not as complex as leveraged acquisitions. They may be financed either by using pre-existing loan facilities or arranging special facilities. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans Mezzanine funding in South African acquisition finance transactions can take the form of pure debt, a combination of debt or equity such as redeemable preference share funding or a debt instrument with an equity kicker. In South Africa, redeemable preference share funding is a popu-
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