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- Acquisition finance
- Security in acquisition finance transactions
Overview — Security in acquisition finance transactions
Typical security and guarantee arrangements in acquisition finance
Acquisition finance transactions often have a broadly similar structure, are relatively high risk and are normally financed on the basis of the current and projected cashflow of the group rather than the value of particular assets. For this reason, lenders will often expect the group to provide a comprehensive security and guarantee package giving priority to:
- • full security and guarantees from material members of the group to reflect the higher risk;
- • share security from holding companies to facilitate ease of enforcement if necessary; and
- • ensuring that the different tranches of debt have the package appropriate to their level of subordination, see Security on deals with different structures.
Security is generally held on behalf of the lenders and other beneficiaries by a security trustee or security agent.
This guidance note covers:
- • the aims when taking security and guarantees on an acquisition finance transaction;
- • the common structure of the security and guarantee package for senior and mezzanine lenders in acquisition finance transactions;
- • issues relating to guarantees such as the guarantor coverage test;
- • security package on transactions with different structures; and
- • issues that arise when negotiating the security and guarantee package.
For more information, see Typical security and guarantee arrangements in acquisition finance.
Intercreditor agreements in acquisition finance
Subordination may be used in certain finance transactions as a way of changing the priority of claims against a debtor often to ensure that repayments of any intra-group loans rank behind repayments of debt provided by external creditors and to govern the relationship between a range of external creditors providing debt to the same debtor. This guidance details the two main ways of achieving subordination in commercial transactions are by “contractual subordination” and “structural subordination”.
This guidance also outlines the key purpose and commonly negotiated provisions of an intercreditor agreement in acquisition finance transactions.
See Intercreditor agreements in acquisition finance.
Financial assistance
Section 260A of the Corporations Act 2001 (Cth) provides that a company registered in Australia can only provide financial assistance to a person to purchase shares in the company, or the shares of the company's holding company (even if that holding company is incorporated outside of Australia), if:
- • that assistance does not materially prejudice the company or its shareholders, or the company's ability to pay its creditors; or
- • that assistance is approved by shareholders of the company (known as a “whitewash”).
This guidance note explains what constitutes financial assistance, the rationale behind prohibiting companies from giving financial assistance and what is involved in the whitewash process.
See Financial assistance.
Reviewing foreign law security documents
Generally, counsel acting both for the borrower(s) and lenders will want to review foreign law security documents.
This can occur where a group company in another jurisdiction grants security over its assets or where an Australian company owns assets located in another jurisdiction.
This guidance note examines the key issues for counsel acting for the sponsor/group when reviewing foreign law security documents, including:
- • compliance with the agreed security principles (if applicable);
- • covenants and costs obligations (to ensure they are not too unduly onerous); and
- • that representations are in line with those in the facilities agreement,
and the key issues for counsel acting for the lenders, including:
- • compliance with agreed security principles (if applicable); and
- • that the drafting of the security document(s) is correct, in particular:
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- ◦ that the correct assets are secured;
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- ◦ that the correct parties benefit from the security; and
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- ◦ that all relevant loans are secured.
Lenders' counsel will also ensure that they are fully aware of any laws in the relevant jurisdiction that might impact on the value of the security or make it hard to enforce, eg signing and perfection issues.
See Reviewing foreign law security documents.