CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
to the target company for working capital pur- poses, which will normally rank pari passu with the term loan. If the revolving credit facility is an asset-based loan, it may be secured by a first- ranking charge on only a subset of the target’s assets (ie, inventory and/or accounts receivable), while the term lenders will have first priority over the target’s remaining assets. Depending on the size of the acquisition, second-lien term loans or bonds could also be issued at the same time. Senior Unsecured Debt Investment grade acquirers may be able to raise acquisition financing by way of an unsecured term loan or debt security. This option is typically not available to non-investment grade acquirers. Senior Subordinated Debt In addition to senior debt, the acquirer may be able to add a tranche of debt that is contractu- ally subordinated to the senior debt, but this is not common. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans While most acquisition financing in Canada takes the form of senior secured and unsecured credit facilities, there are some cases in which there is an added layer of mezzanine financing – typically in the context of acquisitions by private equity funds and going-private transactions. In such cases, a lender will agree to provide senior or subordinated debt on favourable terms that allow a purchaser to delay debt service, com- pound interest or capitalise interest by adding it to the principal of the loan, often referred to as a PIK loan, and defer amortisation. The mezzanine lender is compensated for the additional risk associated with PIK loans and balloon payments on maturity through the pro- vision of equity incentives. These give the lender
an actual or phantom equity ownership stake in the target, or afford the lender greater economic return through enhanced interest or fees tied to the performance of the underlying commercial enterprise. Non-voting preferred shares and penny warrants are common examples of equity compensation provided to mezzanine lenders. Such equity is often complemented by giving a mezzanine lender observer status at board meetings. 3.3 Bridge Loans For larger acquisitions, purchasers often obtain bridge loan commitments whereby one or more lenders agree to advance the needed funds to allow the purchaser to complete the acquisition, but provide for a term of 364 days. In such cases, the financing is set up on punitive terms that pro- vide for gradually increasing credit spreads and additional fees over the term of the loan, typically escalating and payable on each quarterly date from the date of advance. Given this, acquisi- tion bridge facilities are typically and deliberately designed to discourage draws; rather, the inten- tion is to have this committed financing avail- able as a last resort if the purchaser is unable to raise permanent financing (usually in the form of bonds) prior to closing. 3.4 Bonds/High-Yield Bonds A Canadian acquisition may also be funded with debt or equity securities. Please see 2.1 Govern- ing Law for further details on the primary docu- mentation for a debt securities offering. These securities offerings are sold in advance of the closing of the acquisition. Therefore, provi- sion is typically made to address circumstances in which the acquisition is terminated or does not close by the prescribed “outside date” , by virtue of failing to receive the necessary shareholder or regulatory approvals or otherwise. For an equity
95
CHAMBERS.COM
Powered by FlippingBook