USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
Recurring Revenue Transactions 2024 saw the emergence of transactions based on annual recurring revenue (including Vista’s announced take-private of Smartsheets). Only private credit providers have been involved in supporting these transactions, which involve lenders supporting high-growth technology businesses with strong recurring revenue and a promising future which would allow for the trans - action to flip to EBITDA metrics down the line. Delayed Draw Term Loans Private credit providers are well-positioned to make delayed draw facilities readily available. In instances where a sponsor is looking to imple - ment a “growth by acquisition” strategy, this ability can make a private credit solution more attractive than a syndicated option which may not include an accompanying delayed draw component. It is less typical for syndicated solutions to offer sizeable delayed draw com - ponents. Portability Private credit lenders are typically closely engaged with the sponsor and well-positioned to move quickly on amendment transactions. In 2024, a number of amendments and refinanc - ings included the addition of portability (ie, a “permitted change of control”) allowing the Opco to trade hands without triggering an event of default. PIK Sponsors are often seeking PIK options in pri - vate credit transactions to allow the sponsor increased flexibility in managing liquidity. Financial Covenants Financial covenants in private credit transac - tions increasingly look more like financial cov - enants included in syndicated transactions. In
other words, where private credit lenders had previously sought financial maintenance cov - enants applicable to the full facilities, recent pri - vate credit transactions mirror syndicated docu - mentation in providing for a springing financial covenant only applicable to the revolver and only triggered when the revolver is drawn above a certain threshold. 3.2 Key Documentation Many middle market and larger private credit transactions are being structured as unitranche deals with a payment waterfall directly included in the credit agreement itself. This removes the need for a separate agreement among lenders. Still, where a capital structure includes an unse - cured mezzanine debt component, the senior secured facility and the mezzanine debt facility will be bound together by a subordination agree - ment designed to restrict payments on the mez - zanine debt (for the benefit of the senior secured facility). 3.3 Restrictions on Foreign Direct Lenders Foreign lenders may be subject to certain limi - tations that prevent them from leading deals or serving in the agency function. 3.4 Use of Proceeds and Acquisition Financings Using proceeds to acquire (or carry) “mar - gin stock” is subject to certain limitations and restrictions. These apply if the direct or indirect security for the acquisition financing consists of securities that are traded on an exchange in the US, or “margin stock”. These restrictions (often referred to as the “margin regulations”) limit the amount of loans that can be collateralised by these securities.
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