INTRODUCTION TO ACQUISITION FINANCE

MASTER IN INTERNATIONAL ADVOCACY

FINANCIAL TRANSACTIONS
CARLOS III UNIVERSITY

Ignacio Magariños
Jorge Martín Sainz

SHORT TITLE RUNS HERE

20 February 2025 CLIFFORD CHANCE | 1
INTRODUCTION
WHAT IS ACQUISITION FINANCE?

• Acquisition of a company (the “Target”) by normally a private equity fund (a “Sponsor”) using funds made available
by its investors and secured borrowings by way of loans/bonds (“Acquisition Finance”)
• Financial tool in which the debt is repaid using the profits to be obtained by the Target
• Sponsor aims to cut costs, improve productivity and increase profits at the Target
• Once this has been done, Sponsor will exit, either by selling the Target to another Sponsor or a trade buyer or by
listing the target on a stock exchange
• Use of acquisition finance magnifies returns for Sponsors and their investors on a successful exit

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 2
PURPOSE OF ACQUISITION FINANCE FACILITIES

• Payment of purchase price for the Target to Vendors

• Refinancing of existing indebtedness of the Target (which will become payable on a change of control)
• Payment of transaction costs and expenses
• Funding working capital requirements of the Target (revolving credit facilities/letters of credit)
• Funding future capital expenditure
• Payment of a dividend to investors?

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY CLIFFORD CHANCE | 3

STRUCTURING THE TRANSACTION

• Sponsors (identifying/researching Target)

• Tax advisors (tax structure memo)
• Mandated lead arrangers (advising on syndication)
• Professional advisers (due diligence reports)
• Lawyers (drafting/negotiating documentation)

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 4
SALE AND PURCHASE AGREEMENTS

Lenders will need to review the SPA for compatibility

with the financing package

• Purchase price
• Longstop date
– Financing will need to be available until the SPA long-stop date
– Longer availability periods come with cost.
• Conditions
– Bidco will need to certify completed save for payment of purchase price.
• Disclosure, gap controls and assistance obligations around existing debt and security
• Restrictions on amending financing package
• Disclosure to lenders
• Assignment to lenders.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY CLIFFORD CHANCE | 5

INTERACTION BETWEEN FINANCE AND M&A WORKSTREAMS

Relationship between the Vendor and the Banks Key structural issues must be considered at an
• Minimise interaction where possible early stage
• Avoid mutual sharing of documents except on an
“information only” basis • Where does the debt go?
Examples of cross over – Optimising debt service
• SPA will constitute a CP under the facility agreement – Debt push downs
• Banks will want security over the Purchaser’s rights – Holdco financing risk
under the SPA
• Any limitations on target group level guarantees
• CPs including details of overall purchase price (e.g., and security
funds flow statement, base case model, structure
– Financial assistance
paper) can be shared
– Upstream prohibitions and other legal restrictions
(will be jurisdiction specific)

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 6
INTERACTION BETWEEN FINANCE AND M&A WORKSTREAMS
ACQUISITION DOCUMENTS

Key focus for the M&A team – but also relevant from a financing perspective

“Acquisition Documents” will include the SPA, and other key M&A documents – e.g., disclosure letters,
amendments to the SPA.
There will most likely be a rep stating that “the Acquisition Documents contain all the material terms of the Acquisition” –
ensure that all relevant documents are captured.

Acquisition Documents will need to be provided to Lenders as a CP.

Typically, the CP contains wording so that amendments can be made to the form provided to Lenders previously (so
long as the amendments are not materially adverse to the Lenders). This avoids Lenders having a veto right and
needing to be involved in every stage of the SPA negotiations. Bear in mind that Sponsors will likely want to redact the
SPA that is provided to Lenders – exact purchase price is typically not disclosed.

Acquisition Documents should be reviewed from a financing perspective.

Ensure that they can be disclosed to Finance Parties (and their advisers etc.); assignability restrictions need to cater for
grant of Security over them; take note of ongoing obligations (e.g., earn outs/ ongoing guarantees to the Vendor) – these
will need to be permitted under the Finance Documents. Also take note of long-stop provisions for Completion –
availability of any acquisition financing will need to link in with this.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 7
INDICATIVE TIMELINE

Banks and Sponsor sign Sign Facilities Agreement and

Sponsor negotiates Banks sign Facilities Agreement (or ILA) other finance documents (if ILA Post-
Commitment Commitment + satisfy most CPs was used when SPA was signed) closing
Documents with Documents (“Certain Funds”) + satisfy any remaining CPs security
potential lenders

Lawyers mandated + Negotiation of

Financing
Draft SPA and due finance documents in
process
diligence reports parallel with SPA
sent to potential
lenders
3 – 4 weeks 3 – 4 weeks 2 months 30-90 days

Completion of
M&A 1st round 2nd round Exclusive Signing
Acquisition and
process bids bids bidder of
is SPA funding
selected
Regulatory
approvals obtained
(completion/other)

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 8
SUBORDINATION ARRANGEMENTS

Contractual
Structural subordination
Legal
subordination (intercreditor
subordination
agreement)

• Applies on insolvency • Creditors lending at different levels of • Contractual agreement between creditors
corporate structure as to priority of payments (particularly
• Statutory order of payment (fixed
following a default)
security, preferred creditors, floating • Those which are creditors of operating
security, unsecured creditors). companies with hard assets/cash flows • Prohibition on subordinated creditors
have priority. taking enforcement action and
requirement to turn over any recoveries.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 9
STRUCTURING

• Sale of entire Group by enforcing one share pledge

Sponsor and one pledge over shareholder loans
• “Clean break” separating the Sponsor (and its
Topco vehicles) from the Group
Shareholder loans (€)
• Ensures that shareholder funding is always regulated
by the Intercreditor Agreement
Parent
Finance Document “Group” • Regulated by way of “Permitteds” (Bidco is the only
member of the Group that may take on debt from the
Share pledge
Parent)
Bidco
Bank debt (€)
• Entities relevant to the single point of enforcement
Share pledge (e.g. Parent/Bidco) should be regulated by the
Target Holding Company covenant – keep them as “clean”
entities

Target
Holdings

Opco 1 Opco 2 Opco 3 Opco 4

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 10
GUARANTEES AND SECURITY

Guarantees Security

• What is a guarantee? • Intertwined with general structuring

• Recourse to the operating companies • Key for enforcement
• Concept of guarantor coverage • Security granted under separate set of documents
• Guarantee limitations • A vehicle for gaining control
• Agreed security principles
• Terminology

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 11
FINANCIAL ASSISTANCE

• General prohibition: Spanish corporate law places restrictions on Spanish limited liability companies (sociedades de
responsabilidad limitada and sociedades anónimas) granting financing assistance, generally, to acquire its own
shares or the shares of its parent company. In the case of SRLs, of any of the group companies
• Financial assistance includes:
– Providing financing, advancing funds and granting loans
– Granting security interests or guarantees of debt incurred by a third party
– Assisting in any manner that contributes to the purchase of the shares
• Consequences:
– Transaction considered null and void
– May raise liabilities for the directors of the directors of the companies involved

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 12
FINANCIAL ASSISTANCE
FORWARD MERGER

• Art. 35 Corporate Structural Modifications Law: In case of a merger of companies where any of them has incurred
debt, in the three years preceding the merger, in order to gain control over any of the other companies involved in the
merger or to acquire any of their essential assets required to operate in the ordinary course of their business or assets
which are relevant in terms of the equity value
• Special requirements
– Merger project: must specify the resources and the expected repayment calendar to fully satisfy the debts incurred
in the relevant acquisition.
– Directors reports: justifying the acquisition of shares or assets and explaining the merger, including an economic
and financial plan containing a description of the resources and the objectives pursued with the transaction.
– Independent expert: reasonability of the above facts and must expressly state whether any financial assistance
exists. Such opinion if negative prevents the merger?
• Other ordinary requirements of a merger:
– Shareholders majority approval.
– Creditors right of opposition.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 13
SECURITY PACKAGE

SHAREHOLDERS
SHARE PLEDGE
PLEDGE OVER SLA

NEWCO SELLER
PLEDGE OVER SPA
SHARE PLEDGE

PLEDGE OVER BANK ACCOUNTS AND OTHER ASSETS

TARGET
ASSETS
* SHARE PLEDGE
ETC.

SUBSIDIARIES BANK REAL

TRADEMARKS RECEIVABLES
ACCOUNTS ESTATE

*PLEDGE *MORTGAGE *MORTGAGE *PLEDGE

ASSETS
* Financial assistance restrictions

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 14
 OTHER ISSUES

Corporate benefit
• A Spanish company must have a benefit from any transaction it enters into
• To consider that limitation when granting a guarantee or security
• Factual matter to be determined by the directors on a case by case basis on the basis of their fiduciary duties
• Directors conflict of interests
Debt pushdown
• Tax offset against profit
• Improve security package
• Avoid guarantee and/or financial assistance limitations
Approval
• General rule: management body
• Shareholders: articles, contract, essential assets?

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 15
ESG

What is ESG?
ESG stands for Environmental, Social, and Governance. These are three central factors in measuring the sustainability
and societal impact of an investment in a company or business.
ESG in Acquisition Financing
In acquisition financing, ESG factors are increasingly important. Investors and lenders are more likely to finance
acquisitions that align with their ESG values. This can affect the cost of capital and the willingness of lenders to finance
certain acquisitions. Companies with strong ESG practices can attract capital and gain a competitive edge.
• Environmental Factors
➢ Climate Change Risks: How does the target company’s business model contribute to or mitigate climate change?
➢ Resource Use: Does the target company use resources efficiently? Are there opportunities for improvement?
• Social Factors
➢ Employee Relations: How does the target company treat its employees? Are there any labor disputes or
controversies?
➢ Community Impact: Does the target company contribute positively to its local community?
• Governance Factors
➢ Board Composition: Is the target company’s board diverse and independent?
➢ Executive Compensation: Is executive compensation tied to ESG performance?

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 16
ESG

ESG Implementation in the Facilities Agreement

• Sustainability Performance Targets (SPTs)

Setting measurable SPTs and key performance indicators (KPIs) to track ESG performance. The Borrower must meet
these targets to maintain ESG classification and be entitled to certain financial incentives.

• Margin Adjustments
Financial incentives based on ESG performance to reward sustainable practices. Margin adjustments linked to
meeting ESG criteria, providing cost benefits.

• Reporting and Verification

Regular reporting of ESG metrics to ensure transparency and accountability. Independent verification of ESG data to
maintain credibility. Appointment of a sustainability coordinator.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 17
ESG

What is Green washing?

Green washing refers to misleading claims about the environmental benefits of a product or investment. Companies
may exaggerate or falsely represent their ESG credentials to attract investors. Green washing undermines trust and
credibility in the market (reputational risks).
Regulation plays a vital role in preventing green washing and ensuring transparency. The Loan Market Association
(LMA) has developed model provisions for Sustainability-Linked Loans (SLLs) to address the growing demand for
sustainable finance. These provisions include guidelines for margin adjustments based on key performance indicators
(KPIs) and sustainability performance targets (SPTs). The LMA's draft provisions also cover declassification events,
emphasizing the need for clear guidelines and transparency.

Declassification
Declassification refers to the process of re-classifying a loan that was previously deemed as ESG compliant but no
longer meets the required criteria. This can occur due to various reasons, such as the borrower failing to meet
sustainability performance targets (SPTs) or changes in the company's operations that no longer align with ESG
standards.

The LMA allows flexibility for parties to decide on declassification events, as there is no exhaustive list and market
consensus is still developing. Upon declassification, the margin adjustment linked to ESG performance is typically
disapplied, meaning the loan reverts to standard terms
Declassification is crucial to maintain the integrity and credibility of ESG-labelled loans, ensuring that only genuinely
sustainable investments are marketed as such.

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 18
BID DOCUMENTATION PROCESS

“Certain Funds”: how committed is the financing at final bid?

The alternatives are… • What does “certain funds” mean?

• The “commitment letter only” process
– Public company bid – UK “Takeover Code” or
– Commitment papers for final bid (but no overseas law equivalent standard
loan agreement) • The “full documents” process
– Full documents once bidder has exclusivity /
– Full finance documents for final bid.
signs SPA.
• Relevance of vendors’ “process letter”
• Why does type of process matter?
• Always consider when CPs will be satisfied.
– For sponsor and vendor – certainty of funds
– For lenders – level of conditionality • Why do we need commitment papers?

– For everyone – time / cost / “stability” of structure. • Why then also full documents?
• The “Interim Loan Agreement (‘ILA’)” process
– Commitment papers with ability to fund under ILA for
final bid
– Full documents once bidder has exclusivity / signs
SPA (but usually signed just before closing).

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 19
MARKET PRACTICE IN PRIVATE M&A: DEBT FINANCING

7%
50% 67%
47% 46%
38% 33%
UK Financing CE Financing CE CP satisfaction
commitment at signing commitment at signing letter at signing
12%

Commitment Letter, no Interim Loan Agreement Commitment Letter, no Interim Loan Agreement Yes
Interim Loan Agreement Interim Loan Agreement No

Full Facilities Agreement Full Facilities Agreement

CE - Full Facilities Agreement

Interim loan agreement not significant
within CE (7%) but popular in the UK
2020 46%

(50%)
2019 36%
2018 31%
2017 12%
In CE significant increase in the 2016 14%
use of Full Facilities Agreement 2015 52%
2014 58%
2013 48%
2012 32%

0% 10% 20% 30% 40% 50% 60%

EUROPEAN MARKET PRACTICE IN PRIVATE M&A CLIFFORD CHANCE | 20

“CERTAIN FUNDS” REQUIREMENTS

The more “certain” the funds, the more competitive the bid…….

Key elements to certain funds

• Availability Period matching the SPA longstop period (typically 6 months)
• Finance documents fully agreed and signed
– Purchaser will need to satisfy all KYC requirements of banks (acquisition structure must be finalised and bidding
vehicles established)
– Banks will need to have final credit approval (key commercial terms are fixed and CPs relatively final)
• General rule of thumb on CPs:
– Documentary CPs to be satisfied to the maximum extent possible
– Satisfy everything that requires third party input
– Only CPs left unsatisfied should be (i) CPs within the Vendor’s control (e.g., SPA) and (ii) CPs that rely on firming
up details of closing mechanics (e.g., funds flow statement)
• A reduced set of representations and defaults operate as a drawstop on initial drawdown – generally only those
applying to the bidding vehicles and not to the target group

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 21
EXAMPLE OF DOCUMENTATION PHASES

Bid stage Term Sheet(s), debt commitment letter, due diligence reports

Facilities agreement, intercreditor agreement, hedging letter, syndication strategy letter,

Successful bid
approved form of share purchase agreement

Conditions to
Obtaining merger clearance and other regulatory clearances
acquisition

Security documents relating to SPVs/Bidco and Target, utilisation requests/funds flow

Closing
statement, satisfying conditions precedent

Accessions of subsidiaries of the Target as obligors (if possible, pursuant to Spanish financial
Post-closing
assistance limitations), security registrations, entry into ISDA agreements for hedging

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 22
TERM SHEET (“TS”)

“Framework” for the Facilities Agreement

Not usually legally binding on its own

Term Sheet (“TS”)

Contains commercial terms and high-

level legal terms

Different styles (grid, short-form, long-form)

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 23
DOCUMENTS TO BE AGREED AND/OR SIGNED: AT
OR PRIOR TO BID SUBMISSION

Relevant parties • Initial Security Documents

Bidding vehicles only (BidCo/NewCo + Parent) – Security from Parent (shares in and shareholder
Limited role for Parent (signs ICA and some day loans to BidCo)
1 security) – Security from BidCo (bank accounts, rights under the
SPA, rights under Hedging Agreements)
Core Finance Documents – Agree form of Target security to be given by BidCo
Documents based on LMA leveraged finance immediately following closing
documentation (c. 70%) but with some project • Hedging Letter
finance and other modifications: – Minimum hedging requirements (c. 75%) and over-
• Facilities Agreement(s) hedging restrictions (c. 105%)
– Term facility (or facilities) / capex facility / working – Mandate of hedging banks (mandatory initial hedging
+ additional hedging?)
capital facility
– Agreed pricing? Matching rights?
• Intercreditor Agreement
– Execution bank role?
– Regulates the position:
Ancillary documents and CPs
– between senior creditors
– between senior and junior creditors
• Fee letters
– Provides for the security agent to hold the security for • Mandate / commitment / syndication letters
the relevant creditors • Corporate approvals and other associated corporate
CPs for bidding vehicles
– Subordinates shareholder and intra-group claims
• Report proceeds side letter

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 24
DOCUMENTS TO BE SIGNED: POST-CLOSING

Post-Closing Target Group Documents

Relevant Target Group members: • Banks typically require guarantees and security from (i)
• Accede to the Facility Agreement (give guarantees) any “Material Company” (representing at least 5-10% of
Group EBITDA/assets) and (ii) Group companies that
• Accede to the ICA
together represent at least 75-90% of Group
• Give security, but subject to the “Agreed EBITDA/assets (the “guarantor coverage” requirement)
Security Principles”
Hedging Agreements
– Financial assistance • Mandatory hedging to be executed in the relevant post-
– Cost/benefit analysis closing window

– No undue restriction on ability of Target Group to • Hedging Agreements to be based on ISDA forms
do business (Master Agreement and Schedules)
– Excluded assets (particularly relevant on • Schedules may be negotiated with prospective Hedging
infrastructure financings) Banks as part of the closing documentation
Agreed execution window (will be jurisdiction Conditions subsequent?
specific, but usually 30-90 days) • Jurisdiction and transaction-specific requirements to
Which members of the Target Group? be considered
• Usually agreed prior to bid submission based on
EBITDA/asset position • Agreed timeframes will apply

INTRODUCTION TO ACQUISITION FINANCE MASTER IN INTERNATIONAL ADVOCACY (334) FINANCIAL TRANSACTIONS CLIFFORD CHANCE | 25
ACQUISITION DOCUMENTS
W&I INSURANCE

“Warranty and indemnity” insurance (aka R&W (rep and warranty) insurance)

Increasingly common – avoids the need for lengthy negotiations in relation to any warranty cap
applicable to payments by the Vendor. Whether it is used is a question for the M&A team.
Purchaser obtains an insurance policy (for payment of a premium); in the event that SPA warranties are breached, can
claim against the insurer, rather than the Vendor.

Typically, acquisition financing documents contain a mandatory prepayment in relation to recoveries

against the Vendor as a result of a warranty claim.
If W&I insurance is being used, these provisions should also apply to recoveries again the W&I insurer. Consider if the
insurance policy itself should be an “Acquisition Document”, or if it should be addressed separately. Security should also
be taken over the insurance policies (in the same way as security is taken over the SPA).

Policy documents should be reviewed from a financing perspective.

INFRASTRUCTURE ACQUISITION FINANCE CLIFFORD CHANCE | 26

ACQUISITION DOCUMENTS
REPORT PROCEEDS SIDE LETTERS

Ensuring Lenders have recourse to due diligence reports that have been obtained

Lenders typically obtain direct reliance on due diligence reports obtained by the purchaser.
Less common for Lenders to obtain reliance on any sell-side DD, and certain diligence providers unwilling to provide
reliance even when buy-side (common for commercial DD).

Typically, acquisition financing documents contain a mandatory prepayment in relation to recoveries

made by Bidco against report providers as a result of a claim made in respect of DD.
Due to deal timelines, DD is often commissioned by the Sponsor as Bidco will not be incorporated until late in the
process.

Either: Sponsor arranges for all DD mandates to be novated to Bidco (so that only Bidco can rely on the DD reports);
OR
Sponsor enters into Report Proceeds Side Letter/Report Proceeds Turnover Letter.

In this letter, the Sponsor agrees to pay to Bidco any recoveries it makes against a report provider, so
that Bidco can apply the proceeds in mandatory prepayment (or in an enforcement scenario, directly to
the Agent/Security Agent).

INFRASTRUCTURE ACQUISITION FINANCE CLIFFORD CHANCE | 27