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A comparative guide to Danish and United States acquisition and leveraged finance law and structures. Carsted Rosenberg has contributed to the Danish legal analysis and Willkie, Farr & Gallagher has contributed to the legal analysis in respect of the United States of America and New York, published by Lexology/Getting the Deal Through.
Acquisition and leveraged finance structures originally developed in the 1960'ies and expanded rapidly during the leveraged buy-out boom in the United States in the 1980'ies. Early pioneers in the field were Kohlberg Kravis Roberts & Co., a leading private equity fund.
In a nutshell, a leveraged buy-out is the acquisition of a company by another company using a significant amount of borrowed money to finance the acquisition. The assets of the target company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. Generally speaking, debt originating from credit facilities and debt capital instruments such as high-yield bonds have a lower cost of capital than equity capital. This reduces the overall cost of financing an acquisition. The cost of debt is lower because interest payments on debt can be used to reduce corporate income tax while dividend payments on equity cannot. As financial returns can be increased by employing a very high leverage (a high debt-to-equity ratio), it serves as an incentive to leverage as much debt as possible to finance an acquisition. The higher the leverage, the more cash flow the target company must generate to service the debt.
The high-water mark of the leveraged finance boom in the 1980'ies was the take-over battle for the acquisition of RJR Nabisco, Inc., a US tobacco and food conglomerate. The USD 25 billion leveraged buy-out transaction constituted for decades one the leading examples of the possibilities offered for purchasers using leveraged finance structures.
In Denmark, the 2006 acquisition of TDC, a telephone company, by a consortium of private equity funds including Kohlberg Kravis Roberts, Permira, Apax Partners and Blackstone, constituted one of the high-water marks of the acquisition and leveraged finance market in Denmark. At the time, the EUR 12 billion TDC transaction constituted the second largest European leveraged buy-out in history. Concurrently, the combination of lower interest rates and decreasing returns encouraged investors to return to the relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to finance leveraged buy-outs. At the same time, institutional investors were increasingly seeking out higher yield to compensate for a decresing market environment by investing in buy-out funds.
The readily available capital propelled the leveraged finance sector in the period from 2003-2007 to pursue transactions which had previously not been considered feasible in size and scale. Leveraged Buy-Outs were back only now rebranded as Private Equity with a record-breaking level of transactions. The renewed buy-out boom was not limited to the United States as Europe also saw new records being set. The upturn continued until the Credit Crunch of 2007 brought the leveraged finance market to a near stand-still. More than a decade later, the market has recovered, private equity continues to be a large and active asset class, and global investment and exit activity remain at record-level highs. A sale to a private equity fund is increasingly seen as an attractive alternative to an IPO for shareholders.
Documentation
In the United States, the most common choice of law for credit and loan agreements and bond indentures is the law of the State of New York, and most broadly syndicated acquisition financings are governed by New York law. Where the merger or acquisition agreement is governed by a law other than that of the State of New York (e.g. by Delaware law), acquisition financing commitments will provide that the satisfaction of conditions by reference to the law governing the acquisition agreement (in this case, Delaware), and require that all actions against or involving the financing sources be brought in a New York court using New York law.
In terms of purely domestic transactions in Denmark, the documentation will be governed entirely by Danish law. Certain exceptions may apply to overseas territories, such as Greenland, due to devolved legislation. For cross-border acquisition finance transactions, the main finance documentation is predominantly governed by the laws of England and Wales or increasingly by German law or New York law. The local implementing documentation will always be governed by the laws of the Kingdom of Denmark.
Acquisition financings in the United States take multiple forms, depending on the size of the transaction and the relative availability of different forms of debt.
In investment grade transactions, most acquisition financing is in the form of unsecured bank loans (often this is in the form of bridge financing commitments that are replaced by a subsequent issuance of unsecured notes) or unsecured notes.
In non-investment grade transactions, including almost all private equity-led buyouts, the debt component includes senior secured term loans arranged by bank or non-bank arrangers and syndicated to institutional investors. These senior secured term loans may also be divided into first and second lien tranches and, in middle-market transactions may be incurred as unitranche obligations, where the lenders provide the borrower a single-tranche term loan and agree among themselves as to the division of economics and the priority of payments.
In addition, non-investment grade acquisition financings may also include notes issued to investors either via a registered securities offering or, more commonly, a private placement under Rule 144A under the Securities Exchange Act of 1934. Such notes may be senior secured (of various liens), senior unsecured, senior subordinated or subordinated.
Customarily, because it is not practicable to obtain commitments from note investors on the timeline of most acquisitions, buyers will obtain bridge commitments in transactions, including notes from one or more arrangers in an amount equal to the expected proceeds of the issuance of the notes, which will be available to be funded on the closing of the acquisition in the event that the note proceeds are not available at that time. Such bridge commitments are expected by sellers to eliminate conditionality arising from the need to place notes prior to a closing.
Mezzanine financing is also found in middle-market and smaller acquisition financings, but it is a less common component of larger acquisition transactions.
Typical acquisition financing packages will also include a working capital facility, which is typically a revolving credit facility. Such facilities may be unsecured in high-grade transactions or may be secured by all assets or by specific assets (as in asset-backed lending transactions, which may be secured by senior liens on receivables or inventory or other valuable assets), on an equal (pari passu) or senior basis to other financing.
For purely domestic acquisition finance transactions in Denmark, the debt is generally provided via a senior acquisition facility provided by a domestic bank and to a lesser extent by a very small number of banks in a club deal. Traditionally, Danish banks tend to hold on to corporate debt and there is no real secondary debt market in Denmark compared to the London secondary debt market. This is viewed as an incidental part of the overall banking relationship with the corporate borrower.
For large-scale transactions originating in Denmark, a Danish domestic bank will often decide to act as a co-arranger in cooperation with a larger international bank. In general, the larger the transaction the more sophisticated the types of debt in the financing offering will be. It all depends on the scale and the parties involved.
For large-scale transactions originating outside of Denmark, Danish banks will mostly just be a participant in the syndicate without having any influence on the documentation. This usually results in a mere binary decision whether to participate or not.
Mezzanine lenders have generally not played a significant role in the Danish market and there have been relatively few market participants.
Danish banks and financial institutions will often provide credit facilities in a bundle referred to as a multi-option facility (MOF). The MOF may also include a so-called term-out loan, which is a RCF that will be converted into a term loan at some point and then repaid in accordance with a repayment schedule in a number of instalments or rolled over into a refinancing.
While the market has not agreed on a standard documentation, there is a clear trend towards using the recommended forms for credit facilities of the Loan Market Association as a basis for large-cap credit facilities. The documentation is often referred to as "LMA Light" or "Danish LMA" without being a real LMA-style documentation supported by the LMA.
In recent years, however, there has been a noticeable growth in the number of alternative debt providers, mostly in the lower to mid-market segment. Noticeably, the Danish Government Growth Fund has played an active and dominant role as a liquidity provider in that particular market segment.
Comparative guide to Danish and US acquisition and leveraged finance law
The comparative guide to Danish and United States acquisition and leveraged finance law published by Lexology/Getting the Deal Through is available for download here:
Comparison Tool
To compare the issue to other jurisdictions, please consult the Lexology/Getting the Deal Through website. To prepare a tailored comparative guide for acquisition finance within a matter of seconds for Denmark, Luxembourg, Netherlands, Spain, Sweden, Switzerland, Turkey and the United States please consult the professional comparison tool provided by Lexology.
Further Information
Should you wish to discuss acquisition finance in relation to the US market, please consult Bradley B. Furber. Should you wish to discuss any matter in relation to acquisition finance in Denmark, please consult Michael Carsted Rosenberg or Dr. Andreas Tamasauskas.
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