In my prior post, Seven Considerations for Borrowers Completing an Acquisition, I described seven key issues that borrowers should consider when completing an acquisition. Similarly, if your company is considering a disposition (either of assets or of shares) and is a borrower under a credit facility, it is important to consider whether the proposed disposition will result in a breach of any of the provisions of your credit documentation. Here are five key questions to ask when undertaking a disposition:
- Is the disposition permitted under the credit agreement? Many credit agreements contain negative covenants that prohibit dispositions without consent of the lenders or impose restrictions on dispositions. For example, some credit agreements will impose limits on the dollar amount of permitted dispositions (either in the aggregate over the term of the credit facility, in the aggregate over a fiscal year or individually) or a requirement that the disposition meet certain requirements, such as being on reasonable commercial terms with a third party. If the disposition is not permitted, you will need to seek consent of the lenders.
- Is there a requirement to use the proceeds of the disposition in a specific manner? Some credit agreements require either that the borrower re-invest the proceeds of a disposition in the business within a certain time, or that all, or a portion of, the proceeds of the disposition be applied as a repayment of the credit facilities.
- Are there several steps to the disposition? If so, each step should be reviewed to determine whether it is permitted under the credit agreement or whether consents or notices are required under the terms of the agreement in order to implement any step or series of steps.
- Will the disposition affect the calculation of financial covenants? The completion of a disposition may affect the calculation of various financial covenants under the credit agreement.
- Is there a need for a release of security? If the credit facilities are secured, the purchaser may require the delivery of a specific release of security from the lenders whereby the lenders agree to release their security interest against the assets or shares being sold. There may be timing concerns since lenders generally do not wish to provide a release of security prior to the disposition having been successfully completed. These timing issues are typically addressed through escrow arrangements.
As the structure of the disposition 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.