Canadian M&A Perspectives Private and Public Mergers & Acquisitions | Private Equity

Seven Considerations for Borrowers Completing an Acquisition

Posted in Contractual Matters
Ana Badour

If your company is considering an acquisition, and it also happens to be a borrower under a credit facility, it is important that you review the credit documentation to ensure that the acquisition will not result in a breach of any of the provisions. Here are seven key questions to ask when identifying possible issues under the credit documentation when undertaking an acquisition:

  1. Is the acquisition permitted under the credit agreement? Most credit agreements contain negative covenants that may prohibit acquisitions without consent of the lenders, or may allow only certain types of permitted acquisitions.
  2. Does the credit agreement permit the funds thereunder to be used to complete the acquisition? It is typical for a credit agreement to restrict the purposes for which funds drawn thereunder may be used. Such permitted uses may be broad (such as general corporate purposes) or may be quite limited. The funding of an acquisition may or may not be permitted under the agreement. If it is not permitted, you will need to use other funds to complete the acquisition. 
  3. Is there a requirement to deliver additional security? The credit agreement may require that additional security (and corresponding ancillary documentation such as legal opinions, etc.) be delivered in connection with an acquisition.
  4. Will the target be subject to representations and warranties, covenants and events of default under the credit agreement? The representations and warranties, covenants and events of default contained in the credit agreement may automatically apply to acquired subsidiaries. If they apply, these terms should be reviewed carefully to ensure that the target will be able to comply with these starting from the date of acquisition.
  5. Are there a number of steps to the acquisition? If so, each step should be reviewed to determine whether it is permitted under the credit agreement and whether any consents or notices are required under the terms of the agreement to implement such step.
  6. Will the acquisition affect the calculation of financial covenants? The completion of an acquisition may affect the calculation of various financial covenants under the credit agreement.
  7. Does the acquisition target have any existing debt and/or security in place? If so, will such debt be repaid and security discharged prior to or upon the completion of the acquisition? If not, intercreditor arrangements may be required between your lender and the lenders to the target. These arrangements can be time consuming to negotiate and should be identified as early as possible to avoid delays. The terms of the existing debt should also be reviewed to determine whether such debt is subject to any change of control provisions (which may require, for example, consent from the target’s lender to the change of control, or a make whole payment), as this will also affect the analysis of whether such debt should be repaid or remain in place.

On a final note, as the structure of your acquisition transaction evolves, you should regularly review and consider your existing credit documentation to ensure that such changes do not result in non-compliance with the credit documentation.