USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
tial lenders to execute and deliver to it “highly confident letter” . A highly confident letter states that, subject to customary conditions, the finan- cial institution is “highly confident” that it can successfully arrange the acquisition financing for the potential acquirer. Importantly, a highly con- fident letter is not a legally binding commitment to provide financing. US acquisition financings may involve one or more loan facilities. Loans almost always bear interest at floating rates. At a high level, term loan “B” financings can be described as loans provided by institutional lenders or direct lenders to non-investment grade borrowers that require minimal amortisation. At a high level, term loan “A” financings can be described as loans pro- vided by traditional banks to both investment grade and non-investment grade borrowers that require more substantial amortisation. Loan documents typically include the credit agreement, legal opinions provided by the bor- rower’s counsel, certificates signed by officers of the borrower and, where applicable, guarantee and security documents. In transactions where the acquirer has obtained a commitment letter, drafting of the loan documentation will typi- cally commence shortly after the execution of the commitment papers and will be based on the terms set forth therein, and in many cases the loan documentation will be based on “prec- edent” loan agreement that was agreed in the commitment papers. US acquisition financings may also involve the issuance of debt securities. Debt securities may bear interest at fixed or floating rates, although fixed rate securities are more common. Debt securities may be convertible into other securi- ties, such as equity. The primary documenta- tion for an offering of debt securities includes
an offering document provided to potential investors (ie, an offering memorandum or pro- spectus), a purchase agreement or underwriting agreement, an indenture and notes, as well as, where applicable, guarantee and security docu- ments. Commitment letters include the following princi- pal components: • the lenders’ several (rather than joint) commit- ment to provide all or a portion of the facili- ties; • if the facilities will be syndicated, the lend- ers’ rights and the borrower’s obligations in respect of syndication of the facilities; • a summary of the contemplated acquisition transaction, including any restructuring, any additional contemplated financing and any necessary refinancing of indebtedness of the target company or the acquirer; • one or more term sheets describing the key terms of the facilities; and • the conditions that must be satisfied before the lenders are obliged to fund. Prior to executing a commitment letter, the arrangers and their counsel will review the definitive acquisition agreement to confirm it is satisfactory to them, and will then impose a related condition to funding that, substantially concurrently with funding, the acquisition will be consummated in the manner contemplated by the definitive acquisition agreement (without amendments or waivers thereto that are materi - ally adverse to the lenders and to which they have not consented). In addition to confirming that the definitive acquisition agreement reflects the transaction structure (including any required refinancing) and other key terms as understood by the arrangers, the arrangers and their counsel will review the acquisition agreement to confirm
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