Hydee R. Feldstein (Sullivan & Cromwell LLP)

Hydee R. Feldstein (Sullivan & Cromwell LLP)

Availability, Volatility and Conditionality of Acquisition Financing

Going Private: Doing it Right 2009

Footnotes

1. SunGard (spring, 2005) was generally viewed as the US watershed transaction in which the target insisted on both the absence of a financing contingency and a significant ($300 million) reverse break fee and the acquisition financing commitment attempted to limit and match the financing contingencies to the acquisition contingencies. Some of the then-novel provisions that quickly became the new market standard included (a) the company MAC was taken verbatim from the acquisition agreement and there was no general market MAC; (b) the only representations and warranties required to be true for funding were “Specified Representations” mirroring those in the acquisition agreement and a narrow band of additional representations regarding corporate power and authority, enforceability, margin regulations, investment company act and debt ranking; (c) the commitments were not assignable by the lenders prior to closing; and (d) the final form of documentation no longer had to be “satisfactory” or even “reasonably satisfactory” to the lenders but rather consistent with the term sheet and other similar financings by the sponsors.

2. “Flex” or “market flex” refers to the ability of the arrangers to change the terms of committed financing in order to syndicate or sell the loans into the market. These provisions typically were included in a fee letter that remained confidential between the parties so as not to affect the ability of the arrangers to syndicate the loans on the original terms. Open ended flex refers to the ability to alter any terms of a financing as necessary or desirable to syndicate the loan. Closed or limited flex can either (a) permit the modification of terms other than those specified (e.g. no change in total amount provided, in weighted average cost above a specified increase, in amortization or maturity, or in prepayment fees) or (b) permit the modification of specified terms only (e.g. original issue discount or additional fees to market up to a specified amount, addition of specified minimum amortization or change in maximum amount as among various facilities so long as aggregate financing amount remains the same).

3. A “ticking fee” is a fee that is charged to a borrower for holding a commitment open over time. For example, if a transaction has not closed within 90 days, the arrangers may impose a fee of 25 basis points to extend the commitment for another 90 days and for each 90 days thereafter.

4. Anecdotal experience reveals that some recent market proposals for secured debt are being priced for equity returns including substantial up front fees (e.g. 3 to 10 percentage points), significant original issue discount (2 to 5 percentage points) and generous margins (e.g. 6 to 12 percentage points over LIBOR).

5. The increased focus on disclosure also makes some aspects of the standard syndication model obsolete -- the arrangers cannot easily sell more favorable terms into the market where the flex has been publicly disclosed nor can arrangers readily skim fees to market as additional compensation.