M&A in 2010: Transaction Financing Issues in the Current Economic Climate

Transcription

1 M&A in 2010: Transaction Financing Issues in the Current Economic Climate November 18, 2010 Web Seminar When You Think M&A, Think Fulbright. TM

2 Today s Presenters Josh Agrons Corporate Partner, Fulbright & Jaworski L.L.P. L Houston Anita Tarar Corporate Sr Associate, Fulbright & Jaworski LLP L.L.P. Dallas 2

3 Presentation Overview Issues in the Current Economic Climate Accessing Liquidity Certainty of Funds Debt Financing and Market Terms Transaction Structure Commitment Letters Ongoing Covenants 3 3

4 Accessing Liquidity Leverage Type of Financing (ie. ABL versus cash flow) Credit Parties Financial i Institutions i Institutional Investors Hedge Funds and Distressed Debt Traders Credit Risk Loss-Given-Default Risk Industry Sector Sponsorship

5 Debt Financing and Market Terms Transaction Structure Commitment Letters Fee Letters Term Sheets

6 Transactional Structure Sponsor Holding Company/ Guarantor Lender Lender Target AcquisitionCo/ Borrower Agent Lender Subsidiary/ Guarantor Subsidiary/ Guarantor Lender

7 Commitment Letters Set forth the terms and conditions of the agent s, arranger s and lenders various funding obligations. True Commitment: fully underwritten by the arranger(s)/ agent(s) regardless of the ability to fully subscribe the loan Best Efforts : arranger/agent commits to underwrite a portion of the loan and to use its best efforts to syndicate the remainder as a condition to closing Highly Confident Letter: not a commitment to fund but an indication by the arranger/agent of its comfort with the market and ability to arrange funding Proposal Letter: non-binding summary of material a terms 7 7

8 Syndication The syndication provisions define the arranger s rights with respect to syndication and the borrower s obligations in connection with the process. Titles: Lead arranger(s), syndication agent(s), book running manager(s), documentation agent(s), administrative agent, collateral agent, etc. Lenders Active Assistance by Borrower Clear Markets Provision Timing 8 8

9 Conditions Due Diligence: should be as narrow as possible FllDi Full Disclosure No Material Adverse Change Financial Metrics (e.g. EBITDA or leverage test) Market Disruption: requires the absence of any disruption or adverse change in the loan syndication, financial, banking or capital markets that has or could materially impair syndication SunGard Approach [2005]: limits conditionality to (a) the failure of the Target to make representations and warranties set forth in the acquisition agreement and other limited financing representations and (b) the failure to perfect collateral via a UCC filing or other unburdensome activities

10 Conditions cont. Credit documentation Completion of acquisition Equity investment Financial statements and other diligence items delivered Payment of ffees and expenses Corporate structure and proceedings Legal opinions/perfection of security interests Consider terms of M&A agreement (ie. financing out ) Considerations Certainty of funds Heavily negotiated in term sheet/important to seller Reasonable satisfaction/not sole discretion of agent/lenders 10

11 Term Sheets Provide a general description of the material terms of a debt transaction. ti Level of specificity it may be important. t Parties Loan Structure Payment Dates / Interest and Fee Provisions Collateral / Guaranties Conditions i Precedent Representations and Warranties Affirmative, Negative and Financial Covenants Events of Default Agency / Miscellaneous

12 Fee Letters Set forth the fees payable and other terms which are not intended to be disclosed to the lender group. Arrangement Fee: paid to the arranger(s)/agent(s) for syndicating/arranging the financing Upfront Fee: paid to the initial lenders for their commitment to fund; likely identified as an estimate in this market Administrative i ti Agent s Fee: annual fee paid to the administrative agent for administering the loan Work Fee: a deposit for fees and expenses (including due diligence and legal fees and expenses) incurred by the arranger/agent in connection with the proposed financing; unused work fee should be reimbursed Market Flex potential changes to the deal terms

13 Market Flex Bank Affiliate shall be entitled, after consultation with you, at any time prior to the earlier of (a) a Successful Syndication (as defined below) and (b) [sixty (60)] days following the Closing Date, to make any of the following changes to the pricing and terms of the Facilities, if Bank Affiliate determines that such changes are [necessary] [advisable] in order to ensure a Successful Syndication of the Facilities: (i) the call protection for the Facilities may not be more favorable to the Lenders than provision for optional prepayment premiums of 2%, 1% and 0% on the amount of the Facilities prepaid in the first, second and third years following the Closing Date, respectively. (ii) the weighted average interest rate margins in respect of the Facilities may be increased up to [ ] basis points [if the Facilities are rated at least B2 by Moody s and B by S&P, in each case with a stable or positive outlook, otherwise [ ] basis points].

14 Alternate Market Flex "Bank Affiliate shall be entitled, after consultation with you, to change the amount (including, without limitation, by allocating amounts between or among the Facilities), pricing, yield, tenor, terms (including, without limitation, security arrangements and security), conditions and structure of the Facilities, if Bank Affiliate determines that such changes are advisable in order to ensure a Satisfactory Syndication; provided, however, that (a) the aggregate amount of the Facilities shall not be reduced, d (b) the interest trate margin on the Second Lien Term Loan Facility shall not be increased by more than 150 bps per annum and (c) the call protection for the Second Lien Term Loan Facility may not be more favorable to the Lenders than provision for optional prepayment premiums of 2%, 1% and 0 in years 1, 2, and 3 and thereafter, respectively."

15 Alternative Market Flex cont. "At any time prior to the successful close of syndication of the Facility, Bank shall be entitled to, after a consultation period of not more than three days with the Borrowers and the Sponsor, change the interest margin by up to 25 basis points on the Syndicated piece only and structure as Bank determines necessary to achieve a successful syndication."

16 Credit Agreement Overview Based on terms and conditions set forth in term sheet Contains: Payment provisions Closing conditions Representations and warranties Affirmative and negative covenants Events of default Amendment and waiver provisions

17 Prepayments Overview Optional Prepayments Mandatory Prepayments Equity Issuance/Debt Incurrence Asset tsales/recovery Events Excess Cash Flow Considerations Prepayment Fees: application i to voluntary and/or certain mandatory prepayments; negotiate step-downs from anniversary date Order of application Carveout for additional equity investments t No prepayment for most permitted debt Ability to reinvest asset disposition/casualty proceeds Percentage of fexcess Cash Flow tied to Leverage Ratio

18 Affirmative Covenants Overview Financial i ldisclosure, confirmation i of compliance, disclosure of other material information Routine sensible business conduct Maintain security interest Interest rate protection Inspection of book and records Considerations Borrower s public accounting firm should only be required to certify as to compliance with financial covenants. Only agree to provide insurance that is customary and usual in the industry for companies of similar size and capability. Additional collateral only should be required to be delivered if value exceeds a material threshold (e.g., $250,000 in the case of personalty and higher in the case of real property).

19 Negative Covenants Overview Typically include restrictions on: debt, liens, investments (including guaranties), restricted payments, fundamental changes, asset dispositions, affiliate transactions, prepayments of debt, amendments of acquisition documents, constituent documents and other material agreements, etc. Considerations Lenders focused on: Implementation of borrower s business plan Maintaining priority in capital structure Protecting investment Continued disclosure of information Early warning triggers Borrowers focused on: Flexibility to implement business plan Growth of company Avoiding additional fees and expenses

20 Financial Covenants Overview Compare Consolidated EBITDA to: Debt Interest Expense Fixed Charges Asset Coverage Ratio Capital Expenditure Industry Specific

21 Financial Covenants cont. Considerations Early warning trigger: negotiation of appropriate cushions Only test financial covenants as of the last day of the applicable period (e.g. end of fiscal year or quarter), not daily Permit cure of financial covenants with equity investment Capital expenditures should allow for year-to-year carryforward for flexibility, adjustments related to acquisitions and increase for retained excess cash flow/equity investments

22 Events of Default Overview Failure to pay amounts due under credit documentation Breach representations and warranties or covenants Cross default/judgments Bankruptcy/ERISA events Change of control Considerations Grace on payment of interest and amounts other than principal Affirmative covenants: 30 days grace period, except certain identified covenants Financial and negative covenants: no grace period typically Appropriate materiality threshold for cross-default/judgments Change of control: permit exit strategy, inclusion of management and other minority investors/affiliates in control group, lower standard after IPO

23 Agency/Miscellaneous Provisions Overview Voting on amendments/modifications Voting rights can be critical in restructuring scenario Assignments and participations i i Borrower wants to control lender group; lenders want liquidity

24 Questions? Josh Agrons Partner, Houston Fulbright & Jaworski L.L.P Anita Tarar Sr Associate, Dallas Fulbright & Jaworski L.L.P

25 Continuing Education Information If you are requesting CLE credit for this presentation, please complete the evaluation that Fulbright will send via tomorrow. If you are viewing i a recording of this web seminar, most state bar organizations will only allow you to claim selfstudy CLE. Please refer to your state s CLE rules. If you have any questions regarding CLE approval of this course, please contact your bar administrator. NY CLE Number If you should have any questions regarding credit, please Victoria i Beard at vbeard@fulbright.com 25

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