USA Trends and Developments Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
In 2024, several private equity firms (including Blackstone, Thoma Bravo and Advent Interna- tional) completed acquisitions that were funded entirely by cash on hand and capital commit- ments, with no debt financing commitment. Seller financing Lastly, buyers have also increasingly turned to “seller financing” , in which a seller agrees to defer receipt of a portion of the purchase price until one or more dates in the future. In light of the tightening of the syndicated lending market, seller financing has been one tool to help poten- tial buyers bridge the gap between sellers’ ask- ing prices and the amount of other financing the potential buyers are able to obtain. In some recent M&A deals, sellers have been more willing to defer a portion of the cash deal consid- eration as part of negotiations in order to secure a higher overall deal value than may otherwise have been available, given the potential buyers’ dimin- ished access to attractive debt financing. Seller financing can be structured as an interest-bearing note issued by the buyer in favour of the seller, but can also just be embedded in provisions of the acquisition agreement (eg, provisions requiring payments of specified amounts at fixed dates in the future, with such amounts often including an imputed interest component). Notably, there was a marked increase in litigation within the seller financing arena in 2024, as sellers asserted claims and challenges related to non- payments, alleging that breaches of contractual requirements led to missed “milestones” . Liability management exercises Another recent trend in US acquisition financing is the increasing prevalence of liability manage- ment exercises (LMEs). LMEs involve a borrower incurring additional, lower-cost debt from new
lenders and/or a subset of existing lenders in a manner that adversely impacts non-participating existing lenders. As a result, financing sources have become increasingly focused on including “blocker” provisions in their debt documents, specifically designed to prevent these LMEs. Given the prevalence of litigation brought by non-participating lenders against the borrowers in these transactions, these blockers are often referred to by reference to the name of the bor- rower in the transaction that was litigated, such as J. Crew, Chewy and Serta, among others. One category of LMEs is drop-down transac- tions, pursuant to which lenders provide struc- turally senior financing secured by assets outside of the existing collateral package. This is often done by transferring assets to a newly formed or newly designated unrestricted subsidiary that is not subject to the covenants in the existing debt agreement, and by having the unrestricted subsidiary incur new debt and pledge those assets in support of the new debt. In response, various blockers have been developed to limit a borrower’s ability to transfer assets to and make investments in unrestricted subsidiaries, and to designate existing subsidiaries as unrestricted. Other times, a drop-down transaction may be effected by the incurrence of new secured debt by a non-guarantor restricted subsidiary, which is subject to the covenants in the existing agree- ment but has not pledged its assets to support such existing debt. As a result, lenders may also seek to restrict a borrower’s ability to transfers assets to and make investments in non-guaran- tor subsidiaries as well. Another category of LMEs is uptiering transac- tions, pursuant to which a majority of existing lenders exchange their existing debt for new debt while simultaneously agreeing to amend the terms of the existing debt so as to subor-
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