LMA Webinar Overview of the LMA Leveraged Facilities Agreement Edward Aldred, Partner Linklaters LLP

LMA Webinar Overview of the LMA Leveraged Facilities Agreement Edward Aldred, Partner Linklaters LLP

Overview Introduction: role of the LMA Assumptions A typical leveraged buy-out structure Overall anatomy of the LMA Leveraged Facilities Agreement Parties and different types of facilities Drawing mechanics Credit protection package: mandatory prepayments, representations, covenants and events of default Credit support Transfers and debt buy backs Amendments and waivers 2

Introduction: role of the LMA Form of agreement for leveraged acquisition finance transactions First issued in 2004: working party of representatives from banks and law firms Accompanying user guide Relationship to the LMA Investment Grade Facility Agreement No Association of Corporate Treasurers approval Helpful starting point, but not universally accepted standard form: Law firm versions Sponsor own precedents 3

Assumptions Governed by English law Used to fund European leveraged buy-out: Contemplates senior/mezzanine loan structure Equity investment: ordinary shares and loan notes/preference shares No high yield contemplated in the structure European administration and distribution: agent based in London and syndication in the London and European loan markets Amortising and bullet facilities Obligors are companies incorporated in England and Wales (e.g. UK tax gross-up) Guarantees/security provided to senior and mezzanine finance parties 4

A typical leveraged buy-out structure Investors Vendor Equity Investment by way of Loan Notes Vendor Note (deferred Purchase Price) Parent Equity Investment by way of subscription for Shares of Parent (including Preference Shares) Subscription for shares of Company (downstreaming equity investment) and Structural Intra Group Loan (downstreaming equity investment) Mezzanine Lenders Mezzanine Loan Company (Purchaser) Senior Loan (Term Facilities A, B and C plus Revolver) Senior Lenders Intra-Group loans Target Intra-Group loans Hedge Counterparties Subsidiary 1 Subsidiary 2 Subsidiary 3 5

Overall anatomy of the LMA Leveraged Facilities Agreement Section 1: Interpretation Section 2: The Facilities Section 3: Utilisation Section 4: Repayment/Prepayment Section 5: Cost of Utilisation Section 6: Additional Payment Obligations Section 7: Guarantee Section 8: Reps, Undertakings and Defaults Section 9: Changes to Parties Section 10: The Finance Parties Section 11: Administration Section 12: Governing Law and Enforcement Schedules 6

Parties On the Lender side Arrangers Lenders Hedge Counterparties Agent Security Agent Issuing Bank On the Borrower side Parent Company Borrowers Guarantors 7

Different types of facilities Senior term facilities: amortising and bullet (facility A, B and C) Multi-currency revolving facility: Working capital or general corporate purposes What is a clean down? Other financial accommodation permitted under the revolving facility: Letters of credit Ancillary facilities provided on a bilateral basis Incremental/accordion options 8

Drawing mechanics Utilisation request To be delivered within certain period prior to utilisation Utilisation must be within the availability period Satisfaction of conditions precedent Schedule of initial conditions precedent to be delivered Further conditions to be satisfied on date of request and utilisation: no default no event of default (RCF rollover) all representations (if made on the closing date) and certain repeating representations (for all other utilisations) are true (in all material respects) 9

Drawing mechanics Certain funds Concept borne out of UK public takeover market Certain funds period Certainty that funds will be available to fund an Acquisition Purpose Restricts the lenders ability to refuse to fund Certain funds limits the drawstop to certain events of default 10

How the credit protection package fits together Due diligence Reps/ warranties Financial covenants Events of default Mandatory prepayments Disclosure CPs Other covenants Regular information Investment made (drawdown) 11

Credit protection package Section 4: Repayment, prepayment and cancellation Section 8: Representations, undertakings and events of default Most commercially negotiated areas Sections more extensive than LMA Investment Grade Facility Agreement Starting point for negotiations: Nature/sector of business Business plan Transaction specific requirements Local law advice for foreign obligors 12

Mandatory prepayments Change of control/flotation: Definition of control Automatic repayment vs. investment grade formulation: individual lender right Disposals, insurance claims, acquisition/report recoveries Subject to excluded proceeds Reinvestment rights Excess cashflow Annual test with percentage swept subject to a leverage ratio Subject to deductions/de minimis Application of proceeds: ability to waive prepayments for facility B and C lenders Use of mandatory prepayment and holding accounts 13

Representations and warranties What are they? Legal/factual statements made by obligors Broadly split: legal and commercial Why do we have them? Set out the position the lenders believe the borrower to be in: forms the basis of the decision to lend Default if incorrect Drawstop to further advances and (ultimately) rollover loans Risk allocation Obligors risk Breach is a question of degree When are they given? All representations: signing and closing date Repeating reps: date of utilisation request, utilisation date and first day of each interest period Accession of new obligors Materiality What is material? Concept of Material Adverse Effect Subject to Legal Reservations 14

Which representations and warranties? Legal representations Status Binding obligations Non-conflict with other obligations Power and authority Validity and admissibility in evidence Governing law and enforcement Pari passu ranking No default Information representations No misleading information Financial statements Acquisition documents, disclosures etc. Condition of Group Insolvency Environmental issues Pensions Intellectual property Good title to assets Legal and beneficial ownership Security and financial indebtedness Taxation No breach of laws Obligors Group structure chart COMI Holding and dormant companies 15

Covenants: why have them? Lender providing loan investment wants to get it back Supports lenders credit assessment Preserves day-one position on which lenders undertook diligence/credit approval Provision of financial and other information on borrower group Sanction for breach: event of default = lender given leverage to direct efforts to protect its loan investment Main lender concerns: Mitigate insolvency risk Protect assets and lenders (senior) ranking Early warning of problems (financial covenants) 16

What different types of covenants do you see? The LMA Leveraged Facilities Agreement includes three types of undertakings: Information undertakings Financial covenants General undertakings 17

Information undertakings Financial statements: annual/quarterly/monthly Requirement to deliver a budget Compliance certificate to be delivered for annual/quarterly financial statements Content of compliance certificate? Sign off required for compliance certificate? Requirements with regard to the preparation of financial statements: Consistency with preparation of base case model Presentations Other information 18

Financial covenants Test a company s financial performance to a business plan previously approved by lenders Covenants keep lenders risk/reward profile in check Set a minimum threshold for acceptable performance Provide lenders with control if breached: Breach is an early warning sign of financial distress and can allow lenders to take action to protect their loan investment 19

Financial covenants Number and type depends on: Borrower s creditworthiness Size/type of debt Market expectations The 4 pillars : Leverage Interest cover Cashflow cover Capex 20

General undertakings Seek to: Protect assets and lenders (senior) ranking Prevent cash/value leakage/asset depletion/limiting competing claims on the borrower group s assets/fundamental changes to the nature of the business Exceptions: Permitted definitions Permit transactions required to complete the acquisition Ordinary course of trading exceptions Exceptions to provide operational and strategic flexibility Transaction or acquisition specific requirements A general basket 21

Which undertakings? Movement of cash Loans or credit Guarantees and indemnities Dividends and share redemption Financial indebtedness Share capital Dealing with assets Preservation of assets Pari passu ranking Negative pledge Disposals Business focus Merger Change of business Acquisitions Joint ventures Holding companies Others Hedging Access Cash management Amendments to documents Guarantor coverage 22

Events of default: why have them? Trigger which entitles the lenders to: Cancel commitments On demand repayment Demand repayment Enforce guarantees and security Drawstop Contractual remedy which can be used to bring parties back to the table: Bargaining power and control for lenders Renegotiate terms Force reorganisation of debt and business 23

Typical events of default Non-payment Breach of financial covenant and other obligations Misrepresentation Insolvency/insolvency proceedings/creditors process Cross default/acceleration Litigation Pensions Unlawfulness and invalidity/repudiation and rescission Expropriation Cessation of business/change of ownership Intercreditor agreement Audit qualification Material adverse change 24

Events of default: scope Grace periods Application Materiality Clean-up period: Breach of certain representations, undertakings and events of default disapplied for a period following completion of acquisition in relation to target 25

Credit support Guarantees and security Who should provide? Day one vs. on-going requirement Inclusion of guarantor coverage test Agreed security principles Limitations and parameters of guarantees and security package Asset classes Key terms Perfection requirements Cost vs. benefit Legal limitations 26

Transfers and debt buy backs Transferability: Lender must consult with the borrower vs. consent formulation in LMA Investment Grade Facility Agreement Carve outs: affiliates, related funds, event of default continuing Negotiated areas: ratings, industrial competitors, distressed investor, white lists, black lists, all events of default vs. key events of default, different regime for RCF Debt buy backs: Two approaches for group: prohibited or permitted subject to conditions Solicitation or open order process Disenfranchisement of sponsor affiliates: no voting or information rights 27

Amendments and waivers General position: majority lender 66⅔% Certain entrenched rights require all lender consent: Extension for date of payment Reduction in margin Increase in commitment Nature or scope of guarantees and security/releases of guarantees and security Application of proceeds Exceptions: structural adjustment affected lender plus majority/super majority Snooze and lose Yank the bank 28

Speaker contact details Edward Aldred Partner, Linklaters LLP Tel: +44 20 7456 4431 Email: edward.aldred@linklaters.com 29