SOUTH KOREA Trends and Developments Contributed by: Yun Seok Jang, Yong Hee Kim, Gajin Choi, Dae Kun Jang and Seung Hyun Dennis Cho, Shin & Kim
where the financing structure is tailored to the specific aspects of the transaction, including the incorporation of a new entity and the discussion of terms for follow-up investments. Further, PEFs often consider strategies to enhance value through post-carve-out restruc- turing activities, such as mergers, spin-offs, or comprehensive share exchanges involving the newly established company and its subsidiaries, which are collectively referred to as “permitted organisation” . Additionally, PEFs may explore the option of divesting specific business units. To facilitate these plans, PEFs typically negotiate with the lenders to incorporate provisions into the loan agreement that permit such reorganisa- tions, ensuring that these activities are aligned with the agreed-upon terms and conditions. Syndicated Facilities and Interest Rates A financing institution may choose to underwrite the entire acquisition loan facility and engage in multiple sell-downs after the closing or invite other lenders to form a syndicate in order to finance the acquisition. Although syndicated acquisition loans are common in the market, there has been an increasing trend towards a single leader or a small group of arrangers fully committing to the entire facility followed by post- closing sell-downs. In order to facilitate sell-downs, the lead arrang- er may offer interest rate options in the financing terms that allow a loan transferee to select either a fixed rate or a floating rate of interest within a certain designated period of time after the initial utilisation of the loan. Floor rate and market flex provisions were sel- dom included in acquisition financing terms pri- or to 2022. However, due to the recent interest hikes and liquidity crunch, more lenders prefer
to have these interest rate protection options reflected in the financing terms to increase the chances of successful syndication. Bridge Loan A bridge loan is one of the popular ways to finance larger M&A. Bridge loans are generally put in place to bridge the gap between the ini- tial funding of the acquisition and the borrower obtaining the longer-term funding of the acquisi- tion. There are various types of bridge financing depending on the types or the value of the col- lateral provided by the borrower or the sponsor. One of the most common bridge loan types is a short-term bridge loan where a private equi- ty buyer acquires financing to bridge the gap between the acquisition closing and the buyer securing equity financing from its LP (limited partner) investors. These bridge loans are tem- porary loans with a maturity of one year or less. Bridge loans are secured by the equity commit- ment issued by the general partner (GP) investor or the private equity (PE) sponsor, which pro- vides that the GP or the PE is responsible for repayment of the loans should there be a default. Such equity commitment usually provides that at maturity or upon acceleration of the bridge loan due to an event of default: • the PE sponsor is required to make an equity contribution to the borrower in an amount equal to or exceeding the respective bridge loan principal and interest amount; and • the GP investor is required to make capital calls to its limited partner (LP) investors for the purpose of enabling the PE to repay the loan. Prior to the amendment of the Financial Invest- ment Services and Capital Markets Act in 2021,
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