USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
The US margin regulations can also be triggered by the existence of arrangements that consti - tute indirect security over “margin stock”, such as through negative pledge provisions or other arrangements that limit a borrower’s right to sell, pledge or otherwise dispose of “margin stock”. In addition, borrowers and issuers are restricted from using proceeds in violation of applicable laws, including anti-money laundering, sanctions and anti-corruption laws, and these restrictions are usually included in the financing agreement. As a market convention, the use of proceeds for an acquisition financing is often limited by con - tract to the financing of the acquisition (including purchase price adjustments), the refinancing of existing indebtedness and, to a limited extent, for initial working capital. Acquisition financings rarely also permit additional special dividends but earn-outs and appraisal rights are often funded with proceeds of acquisition financings. 3.5 Debt Buyback Generally speaking, borrowers, and their spon - sors, are contractually permitted to buy back term loans (but not revolving debt). The extent to which these purchases may be conducted is often limited to between 25% and 30% of total outstanding term loans. Loan documentation (in both the syndicated and private credit markets) has developed since the great financial crisis to permit non-pro-rata debt buybacks. All except the lowest middle mar - ket loan documentation will include customary provisions permitting Dutch auction buybacks offered to all lenders. Many sponsors also insist on the ability to buy loans from lenders via “open market repurchases”, which may not expressly need to be offered to all lenders.
Any analysis should be undertaken on a case- by-case basis. 3.6 Recent Legal and Commercial Developments Liability Management Transactions Certain liability management exercises have impacted private credit transactions (eg, Plural - sight) and increased the focus of private credit lenders on capacity for investments in non-loan parties and in liability management protections more generally. At this point, private credit lend - ers are increasingly assessing not only the pres - ence of liability management protections but also the flavour of the protections included in debt documents. Portability While M&A and capital markets activity is increasing, the prior trough in deal activity prompted an increasing number of sponsors to seek portability in the form of “permitted change of control” provisions. 3.7 Junior and Hybrid Capital Private credit providers continue to develop and deploy new junior and hybrid capital solutions to provide additional liquidity. These options allow for higher overall leverage levels. In many instances, sponsors are looking to debt-like, non-convertible preferred equity at the Holdco level. 3.8 Payment in Kind/Amortisation Private credit transactions are increasingly
including PIK components. Availability of PIK Option
In the context of a typical private credit trans - action with an Opco (as opposed to a Holdco debt), a PIK option is limited to the first two or three years following the closing date. In other
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