Trends on Acquisition Finance in the United Kingdom

By: Stephen Gillespie and Amy Kennedy, Gibson, Dunn & Crutcher.

1. What are the typical debt components of acquisition financing in the United Kingdom?

Acquisitions in the United Kingdom are typically financed either by way of leveraged loan or high yield bond (or by a combination of both). In the loan market, acquisition financing generally takes the form of all-senior or senior and mezzanine/second-lien structures–in each case, with an amortizing or bullet repayment profile (or a mixture of both across different tranches). In the high yield market, whilst there is a broader range of options, we typically work with senior secured notes coupled with a super-senior revolving credit facility. The relatively buoyant leveraged finance market in Europe through 2015 gave participants the opportunity to import technology, together with certain aggressive sponsor terms, from the U.S. leveraged loan and global bond markets into the European leveraged loan markets. As a result, we have seen an increase in ‘Term Loan B’-style financings (with a single bullet repayment at maturity), and a convergence of market terms and drivers, leading to a rise in cov-loose / cov-lite (covenant loose/lite) style financings and a focus on incurrence-style covenants and other flexibilities.

2. What are the key elements in the acquisition agreement that are relevant to lenders in the United Kingdom? What liability protections are typically afforded to lenders in the acquisition agreement?

The European approach to acquisition financing differs to the U.S. market in that parties will typically satisfy (or have solely within the borrower’s control) all material conditions to the availability of financing at the time of signing the acquisition agreement–what is known in the UK as a “certain funds” transaction. It means that the acquisition agreement will not have a “financing out” that excuses the buyer from performing its obligations under the acquisition agreement if adequate financing is unavailable. Lenders will, however, remain focused on the underlying mechanics of the acquisition agreement, including any long-stop period/outside dates, conditionality, warranty protection, disclosure, and assignability. As a result, in any acquisition financing there is significant time and focus dedicated to the conditionality and related conditions precedent in the underlying commitment papers and/or full-form finance documents. This is of particular significance when working on cross-border acquisition financings spanning both the U.S. and European markets.

3. What is the state of the market in the United Kingdom?

The London M&A/leveraged finance market through the first half of 2016 was affected by a number of macroeconomic factors, including global volatility in energy and commodity prices, together with uncertainty surrounding the U.S. presidential election and the looming “BREXIT” referendum to determine whether the United Kingdom would remain a member of the European Union (see further below). As a result, M&A activity and, consequently, both the leveraged loan and high yield markets, were relatively sluggish, and there were fewer new issuances compared to previous years. As you are aware, on June 23, 2016 the UK electorate voted to leave the European Union. The referendum does not trigger any immediate legal consequences, and the timing for a UK exit from the EU (if at all) is uncertain. However, the vote to leave had an immediate and direct effect on the global finance markets, with uncertainty and volatility across the European high yield and loan markets. There are mixed views as to the medium to long term effects of recent events, but it seems likely that there will be a gradual slowdown in the European finance markets, for at least the summer months.

4. Do you see any trends specifically related to Acquisition Finance that could affect the market in the next 12-18 months?

As noted above, there are mixed views as to the medium to long-term effects of the decision by the UK electorate to leave the European Union, but at this point in time it seems likely that continuing political uncertainty will result in a gradual slowdown in the European finance markets. Looking forward, the continuing volatility in the European loan and high yield markets referred to above will inevitably have an adverse impact on availability and/or cost of some types of finance. Coupled with this, it is assumed that M&A and private equity activity will also decrease, and consequently the volume of pipeline deals and new money issuance will fall. For credits already laden with significant debt, we expect that there will be a resurgence of the types of debt re-profiling experienced after the 2008 financial crisis – for example covenant resets and maturity extensions (i.e. ‘amend and extend’ transactions). We also expect borrowers to look to tap undrawn acquisition lines or incremental facilities as an alternative means of raising financing.

Stephen Gillespie is an English qualified partner in the London office of Gibson, Dunn & Crutcher and Co-Chair of the Global Finance Group. Mr. Gillespie’s practice focuses on complex business transactions, including mergers and acquisitions, divestitures, recapitalizations, workouts, and restructurings. He has particular experience in investment grade, leveraged, and event-driven financing, including distressed scenarios. Amy Kennedy is an English qualified lawyer in the London office of Gibson, Dunn & Crutcher and is a member of the Global Finance Group. Ms. Kennedy has experience in a wide range of banking and restructuring transactions, with particular expertise in leveraged acquisition finance, investment grade, and corporate lending. Ms. Kennedy has experience with senior/junior structures, high yield, private placement, and U.S. financings.

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