USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
PIK Debt PIK debt allows the obligor to pay upcoming interest payments in cash or, subject to certain conditions, in kind – ie, through an increase in the aggregate outstanding principal amount of the relevant instrument. The obligor may have discretion over whether to pay interest in cash or in kind, or the debt instrument may prescribe cash or in kind depending on a specified metric, such as the amount of time that has elapsed since closing or the issuer’s financial perfor- mance or financial position. When included in the capital structure, PIK debt will often be issued by the parent company of the obligor of other debt, and the PIK issuer will generally not be part of the covenant group for other debt that is issued. This structure excludes the PIK debt from the covenant calculations for the other parts of the capital structure, and is generally not secured or guaranteed. PIK debt typically has similar covenants to other debt (in particular debt securities) in the capital structure with customary modifications, including tighter restrictions on dividends and other restricted payments. In European acquisition financing transactions in particular, financial sponsors often add PIK debt to the financing structure after completion of the acquisition as part of a recapitalisation to pay dividends. 3.3 Bridge Loans In the USA, the market practice is for financing sources to commit to a bridge loan facility (ie, a temporary loan facility), rather than commit- ting 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 securities prior to closing of the acquisition. If bridge loans are funded, they are structured in such a way (ie, through interest rate step- ups) to encourage the borrower to refinance as soon as possible. Bridge loans typically have an initial maturity of one year; if they are not refi- nanced within a year, they typically convert into term loans with a longer maturity that can be exchanged for debt securities. Please see 2.1 Governing Law for further infor - mation on bridge loans and debt securities. 3.4 Bonds/High-Yield Bonds Debt securities are commonly used to finance a portion of an acquisition. As with term loans and revolving credit facilities, debt securities may be secured and may be combined in different levels of lien priority. Please see 2.1 Governing Law for further information on debt securities. 3.5 Private Placements/Loan Notes Securities offerings may be conducted on a public basis (ie, SEC-registered) or a private basis (ie, pursuant to an exemption from the SEC registration requirements). Please see 2.1 Governing Law for further information on debt securities. Loan notes are sometimes requested by lenders to evidence the obligation owed by the borrower to the lenders but do not represent a separate financing structure in the USA. Occasionally, the seller of a business will agree to receive a por- tion of the purchase price at a future date as
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