The European Lawyer

United Kingdom Banking/Finance

11 Mar 2010

International Acquisition Finance - England & Wales

Editors: Slaughter and May - Andrew McClean and Sophie Pate

I. INTRODUCTION/MARKET
The deterioration of the global credit market which commenced in the second half of 2007 (the “Credit Crunch”) has impacted the UK market substantially. Whereas, in late 2006 and early 2007 the market appeared to be booming, the latter half of 2007 and the current year have seen a marked reduction in both the number and value of acquisition finance transactions. The following sections of this chapter will provide a description of a typical acquisition finance transaction in England and Wales, shall include those jurisdiction-specific issues which arise under English law and, where relevant, detail how the Credit Crunch appears to have affected leveraged finance deals.

2. STRUCTURE
2.1 Corporate structure
Typically an acquisition finance structure used in England and Wales, as in other jurisdictions, will involve the incorporation of a company (“NewCo”) for use as the vehicle which will acquire the target company or business assets (the “Target”). The share capital in NewCo will be held by the corporate or private equity investors making the acquisition; our focus is more on a structure likely to be implemented by a private equity sponsor, since a corporate acquirer may well seek to make the acquisition itself and based in large part upon its own balance sheet. Where existing managers are remaining or new managers are being brought in to manage the Target, they may also directly or indirectly take part of the equity in NewCo.

2.2 Financing structures and documentation
The choice of financing structure to be used depends on many factors, not least the purchase price and business of the Target, the level of leverage sought and the identity of the purchaser. Financing structures and the documentation used to implement them can therefore range from the straightforward to the highly complex, but generally a purchaser will be looking to optimise the cost of capital used for the acquisition relative to the level of leverage achieved, and will create structures accordingly.

A leveraged acquisition made by private equity purchasers will often involve a financing structure towards the highly complex end of the scale. Typically there will be a senior facility together with a number of other tranches of loan or bond debt. Documents for a predominantly UK acquisition will generally be governed by English law as is the case with the other documents described or referred to in this chapter, except where otherwise indicated.

 (a) Senior facility
 The senior facility will usually provide medium term financing. It is sometimes used as a bridge to a longer term capital structure in which case the initial margin would be subject to step-ups to encourage early repayment. A classic senior A, B, C structure is as follows:

• Facility A: term of seven years, amortising with an average life of no more than 4.5 years and at the lowest margin
• Facility B: term of eight years, bullet repayment at a higher margin
• Facility C: term of nine years, bullet repayment at a still higher margin.

The documentation used will sometimes be based on the LMA model form of senior leveraged facility agreement adapted as required for the transaction, although several private equity sponsors have been able to impose their own “standard” loan documentation which is typically much more favourable to the borrower. Generally security will be required.

(b) Second lien
 Second lien or “stretched senior” debt is debt that is subordinated but which has more in common with senior debt than with traditional mezzanine or high yield debt as it is less deeply subordinated and votes with the senior on most issues. This makes it less  expensive than mezzanine or high yield debt but more expensive than senior debt. Post-Credit Crunch second lien debt, being a product intended to stretch leverage multiples, has largely fallen away.

(c) Mezzanine facility
 A mezzanine facility sits between the senior facilities and equity in terms of its rights in relation to the cashflows and assets of the borrower group. On enforcement the senior debt will be repaid ahead of the mezzanine which will itself be repaid before distributions to equity. Mezzanine debt tends to be expensive; its interest costs are typically paid partly in cash and partly capitalised.

(d) Bridge to high yield
 Senior facilities can be combined with a high yield facility in the same way as senior and mezzanine facilities are combined. High yield facilities involve a capital markets issue and so usually involve a bridge facility to the high yield issue; in only a handful of cases to date has it been possible to synchronise the completion of the acquisition with the closing of the high yield issue. The high yield issue is usually structurally and contractually subordinated to the senior debt and will not ordinarily share in security although there have been exceptions to this. Cash payments of interest are usually made on high yield debt unless there is an interest holiday where the debt has been issued at a discount. High yield debt documents in UK transactions tend to be governed by New York law.

(e) PIK
 PIK or “payment in kind” debt is debt on which the interest payment is rolled up and added to capital and itself attracts interest. Usually a PIK note is issued and on eachpayment date a further note is issued representing the interest that would otherwise have been paid. These new PIK notes themselves attract interest and further PIK notes are issued in respect of them. PIK debt is typically the most heavily subordinated element of the capital structure.

(f) Equity kickers
 Until about 2004 it was quite common for subordinated debt providers to have some form of equity kicker, that is, an ability to take part in the equity success of a leveraged deal. Mezzanine deals often used to involve a warrant issue in favour of mezzanine lenders. Post-Credit Crunch press reports have stated that warranted subordinated debt may be making a comeback.

3. INTERCREDITOR ARRANGEMENTS
The rights and obligations of the lenders of the different types of debt described in paragraph 2.2 above are regulated by an intercreditor agreement. This agreement typically provides for senior debt to rank pari passu with other unsubordinated debt, for second lien debt to rank behind senior debt and for subordinated debt to rank behind all three, with mezzanine ranking in front of PIK debt. In addition, certain of the types of debt, high yield and PIK, for example, are often structurally subordinated to the more senior debt.

3.1 Payment of principal
Senior lenders will receive scheduled, mandatory and voluntary payments in accordance with the senior finance documents. Repayment and prepayment of subordinated debt will generally be postponed to full repayment of the senior debt. Mandatory and voluntary prepayments will be applied to “full” senior debt ahead of second lien debt. Mezzanine, high yield and PIK will generally not be repayable or prepayable before full discharge of the senior and second lien debt. Where there is a bridge to high yield, repayment of the bridge out of the high yield proceeds will be permitted.

3.2 Sharing arrangements
In a senior facility amounts received by one lender may be clawed back in favour of the other lenders in the context of pro-rata sharing, which operates as in any typical syndicated loan. Amounts clawed back are likely to be shared with second lien lenders prior to enforcement, after enforcement it would be usual for payments made to second lien lenders to be paid over to the senior lenders under the sharing clause.

3.3 Contractual subordination
The 1994 decision in Re Maxwell Communications Corp plc (No 2) confirmed the validity of contractual subordination arrangements under English law. Previously they had been doubted on the basis of being arguably contrary to the mandatory principle of pari passu distribution on insolvency. The Maxwell decision was confirmed in 2006 by the Court of Appeal in SSSL Realisations (2002) Limited. Despite this approval of contractual subordination it is usual for intercreditor agreements to include trust subordination provisions as well as contractual subordination, as well as turnover undertakings, as a “belt and braces” approach.

3.4 Structural subordination
Lenders who are structurally subordinated effectively invest in NewCo as shareholders. The structurally subordinated debt is lent to an entity at a higher level in the group structure (“ParentCo”) than the senior debt, and is used by ParentCo to subscribe for equity in NewCo. On NewCo’s insolvency, the subordinated creditor only has recourse to ParentCo, and can only claim what the ParentCo recovers as an equity investor in NewCo (who will get paid last on NewCo’s insolvency). Sometimes, several layers of companies are used, with debt put in at every level. Structural subordination also enables cash dividends to be paid up from NewCo to ParentCo, as a means of repaying the structurally subordinated debt.

4. SECURITY
 (a) Security package
 Lenders will want to take security over all assets and the entire undertaking of the purchaser and the Target group. They will typically also require that guarantees be given wherever possible. The purchaser will wish to resist these requirements and may  try to obtain a position where only material companies have to grant such security and  guarantees. In relation to guarantees and security being given by the Target group the  purchaser will usually require a period of time to put such security and guarantees in place and comply with any financial assistance requirements as described in paragraph  6. The purchaser, depending on the extent of the due diligence undertaken, may not be sure whether the Target group can give the guarantees and security required, or whether the value to the lenders in having such security and guarantees will justify the  time and expense spent providing them. The purchaser will therefore normally try to negotiate a set of agreed security principles with the lenders which provide for cases where the granting of any required security and guarantees is illegal or not possible, or  where the cost and administrative procedure involved in doing so outweighs any benefit to the lenders.

 (b) Security trustee
 In transactions governed by English law, security is normally held through a security trustee. The security trustee holds the security provided on trust for all of those lenders who are to share in the security package. This structure avoids the need to grant the security separately to each lender and each time a lender is replaced and means that a security agency, or a parallel debt provision, both common in transactions governed by the laws of other European jurisdictions, are unnecessary.

 (c) Types of security
 English law recognises a variety of security interests. Those commonly used to secure the financing of an acquisition include mortgages, assignments and fixed and floating charges. Which are appropriate depends, among other things, on the assets over which security is being taken. A particular English law concept is that of the floating charge which constitutes a deferred “appropriation” in respect of a class of assets, including future assets, where the class would of its nature be changing from time to time. Until an event occurs which causes the floating charge to “crystallise” or “descend”, the borrower is free to dispose of and add to the assets comprised in the class in the ordinary course of business. 

5. CORPORATE THIN CAPITALISATION RULES
Optimising potential tax deductions for interest payments is a significant structuring objective in the context of leveraged acquisitions. There are a number of UK tax rules which may affect deductibility. Examples include restrictions which for instance can apply (subject to further detailed conditions) where the interest is results dependent, or where the debt is convertible or attributable to a tax avoidance purpose.

Deductibility may also be affected by thin capitalisation rules in the context of financing arrangements involving related parties, where these arrangements differ from the arm's length provisions that would be expected in the absence of the relationship. This can apply to debt between related parties (e.g., where the group parent raises third party finance and on lends the proceeds to the affiliated acquisition vehicle), or where the terms of a loan from an unconnected third party direct to the acquisition vehicle would not have been available without an implicit or explicit guarantee or other comfort from a party related to the borrower.

In the context of a UK acquisition where third party bank finance is provided to a UK resident, the effect of the thin capitalisation rules should generally be manageable (and thus of no practical significance) in the absence of a guarantee or other comfort that is provided from outside the UK tax group.

Where thin capitalisation is in point, the parties would be taxed on the basis that the arm's length provisions applied, which could potentially disallow a portion of the tax deduction sought for interest payments. Each case will turn on its own facts and the surrounding circumstances, but the extent of any such disallowance will often depend on the extent to which the principal sum borrowed exceeds the maximum amount that would have been lent to the particular borrower in entirely arm's length circumstances. In practice there are no explicit safe harbours. Relevant considerations in assessing the position include the applicable financial ratios, whether the debt is secured and factors relevant to borrowing capacity both in the relevant industry sector and the market in general. Thin capitalisation issues would ultimately need to be resolved with HM Revenue & Customs on a case by case basis, but it should be recognised that resolution prior to acquisition is unlikely.

6. FINANCIAL ASSISTANCE
Companies in the UK are prohibited from giving financial assistance for the purpose of the acquisition of either their own shares or the shares of any holding company by the Companies Act 1985 (the “1985 Act”). The prohibition on financial assistance by private companies in respect of the acquisition of shares in themselves or their private holding companies was repealed from 1 October 2008 but the prohibition continues to apply to public companies (and to private companies in relation to the acquisition of shares in public companies). Historically one of the best-known elements of English law relating to financial assistance was the so-called “whitewash” procedure, whereby private companies were exempted from the prohibition in the 1985 Act provided that they complied with a statutory procedure involving declarations of solvency by the directors, backed up by an auditors’ report. However, following the abolition in October 2008 of the offence so far as it relates to financial assistance by private companies in relation to the acquisition of shares in themselves or private holding companies, this procedure is no longer needed.

6.1 1985 Act prohibition
By virtue of the 1985 Act a company is prohibited from giving financial assistance for the purpose of the acquisition of its own shares. The prohibition also applies to the acquisition of shares in a company by a subsidiary of that company and includes assistance given at or before the acquisition and that given after the acquisition. The prohibition does not extend to overseas subsidiaries giving assistance for the acquisition of shares in a UK parent, or to English incorporated subsidiaries financially assisting the acquisition of shares in a foreign parent, and is subject to a number of exceptions.

Financial assistance shall not be unlawful where the principal purpose in giving the assistance is not the acquisition itself or the reduction or discharge any liability incurred by a person for the purpose of the acquisition, or the financial assistance or the reduction or discharge of any liability incurred by a person for the purpose of the acquisition is but an incidental part of some larger purpose of the company.

The “purpose” exceptions, as the above are so-called, have been the subject of much complex case-law before the English courts and whether a “purpose” exception will apply to a given set of facts will require careful consideration.

There are a number of other exceptions to the prohibition including the lending of money in the ordinary course of the business of the company, assisting an employee share scheme and the acquisition of shares by employees in certain circumstances, which apply to private companies and in the case of a public company, apply where the company’s net assets are not reduced by the giving of the assistance or, to the extent that there is a reduction in net assets, the assistance is given out of distributable profits. Certain other transactions are outside the prohibition including a distribution of the company’s assets by lawful dividend or in the course of the winding up of the company, the allotment of bonus shares and a court confirmed reduction of capital.

Financial assistance can be constituted inter alia by way of gift, guarantee, security, indemnity, release, waiver, loan, any novation or assignment of rights under a loan or such agreement. There is also a residual category of “other” financial assistance which is given by a company the net assets of which are thereby reduced to a material extent or which has no net assets.

If a company gives unlawful financial assistance it is guilty of a criminal offence and is liable for a fine. Every officer of the company is liable to imprisonment for up to two years or a fine, or both. As a matter of common law, the transaction to give financial assistance would be void and unenforceable on the grounds of illegality.

6.2 Refinancings
Financial assistance can still be relevant on a refinancing of any obligation incurred as part of an acquisition. There is a widely-held view that a second or subsequent refinancing would not be caught provided that it was genuinely a separate transaction and not part of a scheme designed to avoid the prohibition against the giving of unlawful financial assistance. In most cases, in order to give financial assistance, any public company wishing to do so is likely to have re-registered as a private company. This means that under the new regime this is arguably less of an issue.

6.3 Guarantees and security granted by the Target group
The granting by a public company Target or its public or private company subsidiaries of guarantees or security in respect of the purchaser’s borrowings made for the purpose of acquiring shares in the Target would constitute unlawful financial assistance unless any of the exceptions to the prohibition mentioned in paragraph 6.1 apply. Where such guarantees and security were required under the pre-October 2008 regime, a clean up period was usually included in the financing documentation to allow for the re-registration of any public company giving financial assistance, or whose subsidiaries are giving financial assistance, as a private company and for the whitewash procedure to take place. It is likely that lenders will continue to allow for a post-acquisition clean-up period to enable the re-registration as a private company of any public company which is giving what would otherwise be financial assistance.

6.4 Directors’ duties
The removal in October 2008 of the offence of financial assistance by private companies does not mean that directors are free to engage without limit on actions which would previously have constituted financial assistance. Generally, directors must still ensure that the company’s entry into the types of transactions which would previously have fallen within the statutory restrictions on financial assistance is in the best interests of the company and in compliance with the rules on distributions and maintenance of capital.

7. ACQUISITION OF SPECIFIC TYPES OF TARGET
7.1 Regulated targets
The acquisition of a regulated Target may require certain regulatory consents and a purchaser should have regard to any ongoing regulatory requirements. Issues which may affect the financing of the acquisition of a regulated Target are set out below.

(a) Financial covenants
 The leverage and interest cover covenants seen in leveraged deals will usually be replaced with a “Regulated Asset Ratio” (“RAR”) and a “Post-Maintenance” interest cover ratio (“Adjusted ICR”). The RAR measures the Target’s total debt against its “Regulated Asset Value” (“RAV”). The RAV is calculated by the relevant regulator and determines the asset value of the regulated Target upon which it is entitled to earn a return. The Adjusted ICR measures the cashflows of the business, after deducting the amount of capital expenditure required to maintain the regulated asset base, against interest obligations. The adjustment requirement reflects the mandatory nature of maintenance obligations in relation to regulated assets.

(b) Investment grade status
 If a regulated entity loses its investment grade status, some regulators may impose (in some cases as a term of a necessary licence) a dividend lock-up within the regulated entity. If debt has been provided at NewCo level (in order to overcome limitations on leverage), this will have an impact on junior lenders who are reliant on dividends for debt service. To address the possibility of a cash lock up, junior lenders may require that a debt service reserve account is maintained (a common technique in project financing structures) and/or permit interest to be capitalised for a specified period. 

(c) Refinancing Target debt
Regulated industries tend to have long term debt financing arrangements (e.g. long term fixed rate bonds) which make refinancing potentially expensive. Such instruments are also likely to contain negative pledge provisions which may be problematic. This means that existing debt is usually left in place (which can increase the cost of the acquisition facilities), or that some kind of capital restructuring will need to take place. Whole business securitisation techniques have been applied to corporate debt in certain regulated sectors and can also be used in order to refinance debt at a level lower down in the corporate structure.

7.2 Listed Targets
Acquisitions of companies having their registered office in the UK, the Channel Islands or the Isle of Man and which have any of their securities admitted to trading on a regulated market in the UK or on any stock exchange in the Channel Islands or Isle of Man must comply with the City Code on Takeovers and Mergers (the “Code”).

 (a) Offer or scheme
 It is increasingly common for acquisitions of listed companies to be made by way of a scheme of arrangement governed by Sections 895 to 899 of the Companies Act 2006 rather than by an offer for the shares in the Target. This is a peculiarly English process, and has the benefit of great flexibility and the potential to bind all shareholders with acceptances of 75% by value. A scheme does, however, require court approval, which has timing implications. Modifications to the financing documentation may be required depending on whether the acquisition is to take place by way of an offer or a scheme, particularly when considering appropriate conditions precedent to the financing.

 (b) Certain funds
 The Code requirement most relevant to the financing of the acquisition is that the availability of funds for the acquisition be “certain”. This requirement arises as a result of the following Code rules:

• Rule 2.5(a) demands that an offeror should only announce a firm intention to make an offer if it has every reason to believe that it can and will be able to implement the offer. For that, it needs to know that it has the requisite cash available. Responsibility here also rests with the offeror’s financial adviser.
• Rule 1(c) provides that the board of the Target is entitled to be satisfied that the offeror is and will be in a position to implement the offer. For that, the board needs to know that the offeror has the requisite cash available.
• Rule 24.7 provides that the offer document must include a statement or confirmation from an appropriate third party (which is invariably the offeror’s financial adviser) that resources are available to the offeror to satisfy in full its cash obligations under the offer. Rule 24.7 implies that the person giving this confirmation may be liable to produce the cash itself if it did not act responsibly and/or did not take all reasonable steps to assure itself that the cash was available. So, in order to give this cash confirmation, the financial adviser needs to know that the offeror has the requisite cash available.

 The Takeover Code is not prescriptive as to what is necessary for the financial adviser   to give the confirmation and practice has varied. A different analysis will in practice   apply to the equity and the debt elements of the required funding. It is usually the case  however that the debt component of the cash required for the offer is established or   confirmed by there being a debt facility made available on a “certain funds” basis.

 The practice is that the lenders must lend during a “Certain Funds Period” so long as   there is no illegality and no Event of Default has occurred which falls within the very   limited category of “Certain Funds Events of Default”. What is a Certain Funds Event  of Default does vary from case to case, but essentially it is limited to events that affect   the acquisition group (that is the NewCo and any other companies formed for the   purposes of the acquisition and excluding the Target) and is limited to events that the   private equity firm or the acquisition group can control. So the typical events that   would allow the lenders to decline making loans would be limited to:

• change of control of the acquisition group;
• non-payment, insolvency, unlawfulness or repudiation events of default by the acquisition group;
• breach of covenants restricting acquisitions, disposals, distributions, requiring the offeror not to carry out business other than being a holding company, negative pledge;
• changes made to terms of the offer or scheme, or declaring the offer unconditional before receiving sufficient acceptances or being obliged to make a mandatory offer under Rule 9 of the Code;
• breach of undertakings relating to guarantee or financial indebtedness amounting to an event of default, in each case by the acquisition group;
• breach of status, binding obligations, no conflict, power and authority, security, ranking, financial indebtedness representations amounting to an event of default, in each case by the acquisition group; and
• illegality.

 The financial adviser gets comfortable with these few events, for the purpose of providing its “cash confirmation” by a combination of due diligence and by taking  undertakings from the investors and the acquisition group.

There is thus no Takeover Code requirement for the certain funds provision to cover working capital facilities or those parts of the acquisition facilities that cover any squeeze out, refinancing of existing target group debt or acquisition costs; the Code only requires this in relation to funds required to complete the Offer. Often in practice,  however, the certain funds language extends to all of these.

• As well as establishing that the debt will be available, the financial adviser has to establish that the equity will be available and this is generally by there being subscription obligations on the part of the relevant private equity funds which are themselves on a highly certain basis including at times being backed by bank letters of  credit.

 (c) Squeeze out
 English company law provides that once an offer has been accepted by a majority of shareholders the bidder should be able to buy those shares which remain outstanding  and the shareholders of such shares should have the right to be bought out (sections 979 to 991 of the 2006 Act). The purchaser’s right to buy-out the minority is triggered once  that purchaser has acquired or has unconditionally contracted to acquire 90% of the shares and the voting rights in the Company to which the offer relates.
 The right of the minority shareholders to be bought out is triggered if the purchaser has obtained 90% of both the issued shares and the voting rights in the company.

 The finance documentation will usually include an obligation on the purchaser to start the squeeze-out procedure within a certain time period and to conduct it diligently and  to keep the lenders informed about the process.

8. PENSION SCHEMES
Recently, specific consideration has to be given to whether either the purchaser or Target groups contain companies with occupational defined benefit pension schemes. The pensions regulator has broad “anti-avoidance” powers to require the scheme employer, or persons “connected” or “associated” with it, to make additional contributions to, or provide financial support for such pension schemes. These powers are exercisable where the regulator considers that the ability of the employer to support the scheme is significantly weakened which can be the result of the entry by the employer or another group company into a transaction. If the transaction falls within the type of transaction which the regulator considers likely to have such an effect, which includes highly leveraged transactions, consideration should be given as to whether regulatory clearance should be sought. “Connected” and “associated” are defined broadly and can extend to both individuals and companies, as well as beyond the corporate group. For example, two companies can become connected by virtue of sharing a director. Lenders will want to address this credit risk through due diligence and documentation.

A clearance statement once issued does not constitute approval of a transaction but rather that the regulator will not use its anti-avoidance powers in relation to that transaction against the scheme employer or companies “associated” or “connected” with it. The process for obtaining clearance will involve negotiations with the pension scheme trustees in order to reduce the effect of the proposed transaction. This may involve making contributions of additional cash or assets to the scheme. In some cases lenders may make obtaining regulatory clearance a condition of the financing.

9. DIRECTORS’ LIABILITY
As noted above in relation to the granting of security and guarantees, and other actions which potentially constitute financial assistance, directors of acquirer or target entities involved in an LBO will need to consider carefully their fiduciary and other duties to the company. In particular, a director has a duty to act within his powers, to promote the success of the company, to exercise independent judgment and to exercise reasonable care, skill and diligence while acting as a director of the company.

10. LEGAL OPINIONS
Again there is little in UK opinions practice, in the context of LBOs, which is substantively different to that in other European jurisdictions. As elsewhere in Europe, but in contrast to the position in the USA, opinions relating to the validity, binding nature and enforceability of obligations in favour of lenders are provided by counsel to the lenders; counsel to the borrowers limit their opinions to issues of due capacity and corporate authorisation.

11. LOAN BUY-BACKS
Post-Credit Crunch leveraged loans in the secondary market are, in many cases, trading at a substantial discount. It has been reported that some US and European issuers have taken advantage of the value in the secondary market for buying back their own debt. The legality of such buybacks is judicially untested in English law. There are at least two significant English legal issues to consider.

11.1 Permitted transferee
Loan documentation often permits assignment or transfer of participations in the facility to a “bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets” – this is the LMA formulation and it is frequently found in other documents. It is arguable that certain borrowers may fall within this widely drafted language, for example a borrower who regularly engages in intra-group lending – but there are strong counter-arguments that this is not what is intended by the drafting.

11.2 Borrower contracting with itself
Even if the borrower is a permitted transferee the legal effect of the borrower becoming its own lender is unclear. There is doubt as to whether this is conceptually possible due to the legal principle that a party cannot contract with itself. The debt is likely to be extinguished by the transfer or assignment due to this principle which gives rise to the argument that this should be recharacterised as a prepayment. If this is the case then the provisions as to prepayment in the facility agreement will apply and the consideration for the “transfer”, rather than being payable to the transferring lender, should instead be shared among the lenders pursuant to the sharing clause in the facility documentation.

The borrower may get around the recharacterisation problem by arranging for a company in its group to be the transferee. In both cases though the borrower will have to consider other provisions of the facility agreement. For example, there is usually a provision preventing both the borrower and members of its group from making loans.

11.3 Available cash and alternative solutions
As a practical matter a borrower can only buy its own debt to the extent it has cash available to do so. Available cashflow may be limited by the financing documentation. As a result of this and the lack of clarity in relation to the legal position, borrowers and their sponsors may investigate the possibility of setting up dedicated vehicles to purchase their debt below par. Alternatively a borrower could enter into a sub-participation or total return swap arrangement, neither of which are usually limited by a facility agreement, subject to the terms of any covenants.

11.4 LMA changes
The LMA has indicated that it will publish some optional language for use with its model form documentation to address the possibility of debt buybacks . It is likely that the LMA will include language both permitting and prohibiting loan buybacks, to be negotiated between the parties. They will also deal with the issue of voting rights and the extent to which these may be exercised by purchasing group members or affiliates.

12. POST ACQUISITION RESTRUCTURINGS
A wide variety of post-acquisition restructurings are of course possible; none of these are peculiar to English law. A significant category of such restructurings is those carried out as a “debt push”, or in other words for the purpose of refinancing acquisition debt at a level closer to the operating assets. This reduces the effect of structural subordination of acquisition debt, being at Newco level and above the operating businesses being acquired, and potentially increases the level of security available.

13. DEBT RESTRUCTURING
The default rates for LBO structures have remained remarkably low over the entire period of the private equity boom which has been interrupted by the Credit Crunch. Some observers comment that this is in part the result of the weakness of covenant protection in favour of the lenders, and the ease of refinancing meaning that defaults and restructuring have not been necessary. However, there is a growing consensus that default rates are now likely to increase as a result of the worsening economic macro-environment. There is also a widespread belief that the resulting debt restructuring discussions will be much more complex than any that we have seen in previous economic slowdowns, as a result of the spiralling complexity of the debt structures which have been put in place and of the splitting of credit and other risks which has taken place, for example as a result of the proliferation of credit default swaps and the greatly-increased involvement of non-bank lenders.