USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
Often an acquirer requires committed financing but prefers that securities (typically, debt securi- ties), rather than loans, comprise at least a por- tion of the acquisition financing. In the USA, the market practice is for financing sources to com- mit to a bridge loan facility (ie, a temporary loan facility), rather than committing to underwrite the securities themselves, with the intention that the securities will be issued in advance of, and in lieu of, the funding of the bridge facility. As a result, acquirers will normally obtain a commitment for a bridge facility in an amount equal to the amount of securities they wish to issue and simultaneously enter into a securities engagement letter, whereby they will engage an investment bank to lead the offering of those securities, with the intention of issuing the secu- rities prior to the closing of the acquisition. Pro- ceeds of debt securities issued prior to com- pletion of an acquisition are typically subject to mandatory redemption (at 101% or, in the case of non-investment grade issuers, 100% of par plus accrued and unpaid interest) if the acquisi- tion is not completed and, in the case of non- investment grade issuers, held in an escrow account pending completion or redemption. The “securities engagement letter” is executed by the acquirer and one or more investment banks, and sets forth the terms of the engage- ment of the investment banks, including fees. The investment banks selected to lead the securities offering are typically the broker-dealer affiliates of the arrangers that have provided the commitment for the bridge loan. The engage- ment letter will often include terms for the debt securities that the investment banks will attempt to achieve on “best efforts” basis that they were not willing to underwrite in the bridge loans.
The primary definitive document for a loan is a credit agreement. If the acquirer has obtained a commitment letter, the credit agreement will be based on the terms set forth in the term sheet attached to the commitment letter (or as may be modified by the “market flex” provisions or otherwise agreed between the borrower and the lenders) and will supersede the commitment let- ter, other than certain fee and indemnity provi- sions that may by their terms survive. The main provisions of a credit agreement include: • the definitions of relevant terms, including financial terms; • representations and warranties;
• affirmative covenants; • negative covenants; • prepayment provisions;
• conditions precedent to funding, including, in the case of a revolving facility, conditions to future borrowings;
• amendment provisions; • events of default; and • other miscellaneous provisions.
The definitions section of a credit agreement receives significant attention because certain defined terms are fundamental to many of the key restrictions and obligations of the borrower, especially financial terms such as “EBITDA” , “total net leverage” or “excess cash flow” . The representations and warranties in a credit agreement will focus on the combined business of the acquirer and the target company, as well as the enforceability of the loan documentation and any guarantee and collateral documents. The representations and warranties will be made at the time the credit agreement is executed and again at closing of the facility (ie, the initial fund- ing, which typically corresponds with the closing date of the acquisition). In the case of a revolving
527 CHAMBERS.COM
Powered by FlippingBook